What's Up With Land Rental Rates For 2014?

They might be going down; at least the highest rents show signs of softening.

Published on: Aug 30, 2013

Iowa State University Extension farm management field specialists held approximately 70 meetings around the state during the past month or so, addressing crop land rental rates, leasing arrangements and related issues. How is farmland leasing for 2014 shaping up?

After listening to farmers and landlords who attended these meetings, and fielding their questions, the ISU specialists say 2014 might be the year we start to see some changes -- a different kind of change than we've seen the past several years. What goes up must come down especially the highest cash rents that were paid in 2012 and 2013. With a larger harvest forecast for this fall, crop prices are projected to decrease in the coming year.

IS THE PARTY OVER?: After several years of large increases in rents and land values, 2014 might be the year we start to see things head the other direction, says ISUs Kelvin Leibold. Factors affecting next years cropland rental rates are looking different than what weve seen the past few years. While far from rock-bottom, crop prices are dramatically lower than the record highs of 2012.
IS THE PARTY OVER?: After several years of large increases in rents and land values, 2014 might be the year we start to see things head the other direction, says ISU's Kelvin Leibold. Factors affecting next year's cropland rental rates are looking different than what we've seen the past few years. While far from rock-bottom, crop prices are dramatically lower than the record highs of 2012.

Points to ponder as you decide how much to pay for cash rent in 2014

Kelvin Leibold, ISU Extension farm management specialist at Iowa Falls in north-central Iowa offers the following considerations for tenants and landowners to ponder as they look ahead and plan leasing agreements for 2014.

* Results of ISU annual cash rent survey. In May, the annual ISU Extension and Outreach leasing survey was released reporting on the 2013 values for rental rates. You can find the results online on the ISU Ag Decision Maker website. They are in AgDM File C2-10, Iowa Cash Rental Rate Survey.

The survey reports the rental rate survey for each county, crop reporting district and the total average for the state of Iowa. Along with the overall average for the county, averages for high, medium and low-quality cropland are also reported, along with a range for the three averages. In recent years, the range for cash rents has widened considerably as rents have increased with some rents increasing much faster than others.

The intent of this survey is to report typical rents that are being paid each year, not the highest nor the lowest values heard through informal sources. Rental values were estimated by asking people familiar with land rental markets what they thought were typical rates in their county. Information about rents for individual farms wasn't collected. The survey gives the number of respondents for each county, the last five-year average for corn and soybean yields, and the average row crop CSR (Corn Suitability Rating). The report also gives the average rent in dollars per bushel for corn and soybeans as well as dollar per CSR point.~~~PAGE_BREAK_HERE~~~

Some rents are based or indexed on the crop yield or CSR rating of the soils. The CSR system is currently undergoing changes and by this winter we should have a new system available called CSR2. Information on the CSRs and other soil topics can be found here. The proposed CSR values can be found here.

Why is corn production more profitable in North Dakota than in Iowa? Rent per bushel of corn produced is a lot lower in North Dakota.

Typical rents per bushel for corn range from $1.40 to $1.80 per bushel in Iowa. Compare this to North Dakota, where the typical rent per bushel of corn is often less than 50 cents and you can see why there has been an increase in corn production in North Dakota. This difference is also why in recent years corn production in North Dakota has been more profitable than corn production in Iowa.

Issues to consider when establishing a rental rate for 2014

When landlords and tenants establish rental rates they often look at the following: what other farmers are paying, average crop yields, CSR Index, share of the gross crop value, the return on investment, percentage of the crop and the tenant's residual. Currently, in late summer 2013, the factors affecting next year's rents are looking different than what we've seen the past several years.

* Grain prices and basis shift. Looking ahead to factors impacting rents in 2014, one major issue to consider for the coming year will be grain prices. A shift is occurring from the past several years of continuously rising prices with a recent decline in grain prices. Figure 1 shows the dramatic price decline based on estimates for the 2014 corn crop. The change in the Chicago Board of Trade (CBOT) only partially reflects the severity of the situation. The other issue is the drop in "basis" – the difference between CBOT prices and what the local elevators are paying.~~~PAGE_BREAK_HERE~~~

In Table 1, you can see that the elevator was paying $1.22 above the futures price for 2012 old crop corn. For new crop corn coming out of the field, they are paying 35 cents less than the futures prices and for 2014 new crop corn they are offering 50 cents under the CBOT price. The result is that it looks like many farmers will see offers for 2014 corn at prices that are almost $2 per bushel less than what the market was offering on old crop corn just a month ago.

* Rising crop production costs. A second issue that will be a major factor in 2014 will be input costs. Land is the residual of all profits and with one-year leases, for the most part, land rents have captured the increase in profits relatively quickly. The question for 2014 may be, "If profits decline, will land rents reflect that as quickly?" Table 2 shows land rents have increased by almost 50% over the past five years.

A recent ISU survey looking at land tenure indicates that about 16% of the cash rent leases in Iowa have attempted to balance out some of the risks of price and yield volatility by going to some type of flexible cash rent lease. As volatility continues for both grain prices and crop inputs, we may see more use of flexible leases across the state. Additional information on flexible cash rent leases can be found here.

* Conclusion: The recent dramatic grain price drop will result in many farmers facing challenges to make a profit at some of the current rental rates. Looking forward, it is likely that some of the rental rates that are on the high side for the level of productivity will need to be reviewed. We may still see others that are on the very low side that will continue to increase.

More information on leasing can be found at the ISU Ag Decision Maker website.

For farm management information and analysis go to ISU's Ag Decision Maker site and ISU Extension farm management specialist Steve Johnson's site.