When Iowa State University Extension released its annual land value survey results in December, it pegged the average acre of cropland in Iowa at $6,708 — up 32.5% from a year earlier. How does increased land value correlate with cropland rental rates?
ISU economists have studied cash rent as a percent of land value in recent years; it averages out to about 4%. So with higher crop margins causing higher land values, higher cash rents will follow. ISU also conducts a cropland rental rate survey each spring, with results released in May.
ISU Extension farm management specialist Steve Johnson has plotted a graph showing the percentage increase in Iowa average cash rental rate for cropland compared to percent increase in land value. Before 2006 the increases in land value and cash rent rates were fairly close, but since then, land values have raced higher. “Iowa cash rents will increase along with land values,” notes Johnson. “However, they usually trail the land value rise, sometimes by six months to a year.”
• A rapid rise in land values will mean higher cash rents for cropland in 2012.
• Crop prices have dropped since the highest cash rents were set last summer.
• Many cropland rental rates are being negotiated or renegotiated this winter.
The reason cash rents won’t likely correct for a year is because of the time lag associated with cash rental rate negotiations. What will happen in 2012? If you take the average Iowa land value of $6,708 and multiply by 4%, the answer is $268 per acre for cash rent, a 25% increase. While cash rents don’t rise as fast as land values, the caution is, what happens if land values go down?
“Cash rent is following land values higher. Even if crop prices are lower in 2012 than in 2011, rents will rise,” cautions Johnson. “There lies the importance of having a flexible cash rent lease, instead of a cash rent lease that is set at a fixed amount. A lot of the fixed rental rate leases were negotiated prior to Sept. 1, 2011, and have higher rental rates because crop prices were much higher than today.”
Cash rents are climbing
On Aug. 31, December 2012 corn futures were at $6.70 a bushel. So it’s likely cash rents for 2012 that were set last summer before Sept. 1, or shortly thereafter, are some of the higher cash rents negotiated. In January and February, “we will see a lot of land leases negotiated or renegotiated,” Johnson says. “Some for the first time with fixed rents and some for the second time. We’re already seeing a tremendous interest by farmers and landlords in flexible cash rent leases, as opposed to straight cash rent leases with a fixed rental amount.”
Some people negotiated high rental rates last summer and early fall, but with the crop price drop since then, there is concern as to whether those operators can make the high cash rents work in 2012. “There’s a lot of risk with high fixed cash rental rates. Potential revenue risk is obvious, reflecting nearly a $100-an-acre revenue drop in just four months, due to lower 2012 futures prices,” he notes.
That’s why more farmers are interested in switching to flexible cash rent lease arrangements this winter. “I’m not saying there’s a certain level of cash rent you reach that’s bad,” says Johnson. “But there are some extremely high cash rents out there in the $400-to-$600-per-acre range; we know they exist.
“Are crop prices and yields going to be high enough to cover this fixed cost in 2012? Crop production costs are rising. Will you be able to lock in a profit margin for the 2012 crop?” he asks. “Those are key questions that need to be asked by landowners and their farm operators this winter.”
This article published in the January, 2012 edition of WALLACES FARMER.