Farmland Rental Rates Lagging Rising Land Values

Farmland in the USA. The round fields are due ...

The USDA’s semi-annual survey on the state of farm finances, called the Agricultural Resource and Management Survey (ARMS) is “the only national survey that annually produces observations on field-level farm practices, the economics of the farm operating the field, and the characteristics of farm operators and their households”.  This year’s ARMS look at the economics of farm operations is showing a race between rented and purchased land prices, both rising, but one lagging the other significantly.

Owning Vs. Renting Markets

Ownership means less in the land use picture than in other lease-driven sectors. Typically, rented farmland is worked according to the needs of the renter, not the landlord.  Leases are often informal. According to the most recent survey, 93 percent of producer/respondents say the landlords aren’t involved in the decisions about land use, crop or livestock selection.  That said, the booming market in farmland might suggest that capital is flowing to such deals from distant capital centers.

Not so, says the survey.  75% of landlords live in rural areas within the state where the farm is located.  About 17% of those are within the state, but in “urban” areas (rated as populations over 10,000).  Only 8% of farm landlords live out of the state, according to the USDA study.

The average US farm has approximately three rental agreements in place. These might include fixed or flexible cash rent, crop share and even free rental agreements. As the farm size rises, the number of rental agreements increases.

According to presenters at Farmland  Leases: Tales, Types and  Trends, a conference sponsored in November 2012 by the Chicago Federal Reserve, higher crop prices are forcing changes in rental agreements, requiring renters to make extra payments, often based on crop prices and yields. Even so, cash rental rates are lagging ownership prices in farmland.

Iowa Farmers Warn Of Land Price Bubble

Rental and ownership looking flush as it is, who’s on the bearish side?  Farmers.

Some producers see bad weather coming in ag land prices.  A statewide poll of Iowa farmers returned an alarmingly high percentage of farmers agreeing that farm land price levels are unsustainable.

A majority of the farmers responding to a statewide poll believe Iowa farmland is overvalued and prices are much higher than the land is worth.

Sixty-eight percent of the producers responding to the 2012 Iowa Farm and Rural Life Poll agreed that farmland values are too high and cannot be sustained at current levels. Forty-eight percent agreed that “the farmland market is in a bubble that will eventually burst and lead to major drops in values.”

Other farmers were more optimistic, with 41 percent believing that land values will continue to rise, but at a slower pace. More than 60 percent of the poll participants agreed that quality cropland is still a good investment.

Asked to rate the impact of a number of factors on recent farmland price escalation, 85 percent agreed or strongly agreed that high corn and soybean prices was the most influencial factor driving higher prices. Seventy-two percent believe competition between neighboring farmers who want to expand their land also is a major influence boosting land prices at auctions.

Two-thirds or 66 percent of farmers indicated that low returns on other types of investments was a strong or very strong influence. Seventy-one percent of survey respondents agreed that rising land prices have led to intensification of farming.

Somewhere between the bear and the bull lies the barn.  What will its future hold?  Is a kind of financialization of farmland underway where non-operator owners will ultimately make a killing but leave the operators in a lurch?  Or is the explosion in population and food demand a built-in support for land prices and rents?  Time will tell.

04. February 2013 by Wayne Grohl
Categories: Agricultural, ALC | Tags: , , , , , | 1 comment

One Comment

  1. I actually have a small 58 acre horse farm. We have a constant 10 acres of alfalfa to feed our horses, about 5 acres for our home and small garden and the rest in crops. A neighborhood farmer farms the 10 acres alfalfa and the rest of the crops. It works well. We get the alfalfa for free and he can do what he wants with his crops and we don’t have to maintain that part of the land. When we bought the property, it had been a former pig farm and the land was pretty much dead. It had absolutely nothing in it. The farmer has fertilized and got the land in shape to grow great crops. If we sell, it will be much improved so we should make money on it. This arrangement is not unknown in this area. It has many Mennonite and Amish farmers and the barter system is alive and well!

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