Whats an acre worth?

Aug 28, 2009
by DTN
What’s an acre worth?

It is taken on faith that this year’s farmland rental rates—which hit $500 per acre in a few cases in Illinois—reflect last year’s economy at least, if not the past couple of years. Landlords nearly everywhere set higher rental rates this year because 2008’s crop income was so good.

“This is a catch-up year on the upside,” explained Steve Diedrich, farm/property manager of Martin, Goodrich & Waddell Inc. of Sycamore, IL. “That’s probably the best way to put it.” More than a few rents for 2009 were set with $5- to $7-perbushel corn in mind. Corn was selling for below $4 per bushel when this article was written in July.

Holding steady

In question is what direction cash rents will take for 2010. “Right now, everything is in so much limbo,” said Diedrich, whose firm manages scores of operations for mostly retired and investor landlords. “We think [cash rental rates] will hold steady for next year, but they may not.” Things can change quickly. In USDA’s survey of cash rents for 2008, only seven Corn Belt counties had an average price of more than $200 per acre—six in Illinois and one in Iowa. But in a recent Iowa State University (ISU) Extension survey of cash rents paid this year in Iowa, no fewer than 24 counties had averages above $200. The ISU survey showed the highest average in the state ($241 per acre) was in Grundy County, IA, whose prized farmland gets an additional bump from the fact that about 25,000 acres there are used to grow valueadded hybrid seed corn on contract. The range of rents paid in the county for the best one-third of land ran from $235 per acre to $350. While $350 is considered a startlingly high price, some parcels in the competitive hotbed of central Illinois actually fetched $500 per acre. The number seems almost unbelievable and is hard to verify as most landlord-tenant agreements are private matters rarely discussed publicly—particularly by those paying those rates.

However, a public cash rent auction in the region last August garnered a lot of attention when the high bidder paid more than $400 per acre. The price did, however, include the significant cost of fertilizer. Participating in that auction (but not the winner) was Rick Rosentreter of Carlinville-based (Macoupin County) Illinois Family Farms.

“In this area, what you have are three very large [20,000-acre-plus], aggressive operations within a 50-mile radius,” Rosentreter said. “That tends to inflate rents.”

Though he doesn’t talk specifically about any of his rental agreements, he doesn’t deny that his operation may have entered the $500 club— cash rents that don’t include the cost of fertilizer.

“I do know,” Rosentreter said, “that rental rates have dropped $75 to $100 per acre off the highs set at the end of last summer.”

In Iowa’s Grundy County, farmer Dave Hommel and his father, Tim, lease ground from seven landlords, and each case is unique. He declined to give specifics on their rental agreements.

They use cash rent, crop share and flexible cash rents, depending on the preference of the landowner.

“Everyone is sitting tight right now,” said Dave. “It’s pretty hard to get landlords to decrease rent,” he admits. “Barring a major disaster, I don’t see anything going down.” Bruce Hayes, who also farms in Grundy County, tends to agree. “We would have thought there was a time here [eight] months ago when rents were way too high and there would have to be some adjustments down.” But input prices have declined and crop prices remained relatively strong as summer began.

Hayes and his brother Sid work with about 15 landlords—all cash rents. Still, every situation is different, according to Bruce. Citing their long relationship working together, some landlords will seek the brothers’ input as to what a fair rent should be. Others will refer to specific top rents in the area, indicating they want something near that price.

“[Landlords] may not want top dollar, but something fair,” said Hayes. “They pay attention. Volatility in these markets is driving everything.”

“I could envision circumstances in which corn could go to $6 or $7 per bushel or go down to $3.25,” said Rosentreter. “Those are completely different scenarios. But the market is going to give direction as to how rents play out.” “On the positive side, commodity markets have come back up, and fuel and fertilizer prices are lower than they were in 2008,” said Bill Ayers, real estate broker and farm manager with Farmers National Co. for the midsouth regions of Arkansas, Mississippi, Louisiana, Missouri and Tennessee. That bodes well for rents at least staying where they are. To a lesser extent, rents in the South have followed midwestern trends, according to Ayers. Highly improved, irrigated and precision-leveled land in the region rented for $170 per acre last fall. Rates for the same type of land have probably declined to $150 per acre now. Good dryland might fetch $60 to $70 per acre. Rates in the South are buoyed by farm program payments for cotton and rice—payments producers receive even if the land is being planted now to corn and soybeans. Cotton and rice receive higher subsidies and “the government payments drive the cash rents,” said Ayers.

“The biggest factor that is going to impact rents in 2010 is if the current administration does anything to reduce the government payments in agriculture,” said Ayers.

Jim Layton, who runs Laymac Inc., a commodity brokerage firm in Chicago, says there will be a “big review of the situation for 2010” for tenants and landlords.

He also owns farmland in the Decatur, IL, area. While the sky-high prices of 2008 presented a “special set of circumstances,” he isn’t so sure we aren’t “going back into another one of those situations” with crops this year planted late under less-than-ideal circumstances in many areas.

Rumors were rampant last summer and early fall that landlords were requiring multi-year rental agreements based on last summer’s peak crop prices. But farmers and landlords tell us the opposite may actually be happening, and, if anything, that the terms of some agreements are shortening.

It’s bad enough to feel you’ve been caught on the wrong side of the equation for one year, let alone several. A landlord doesn’t want to be caught in that position any more than a tenant.

That certainly includes input costs. In Illinois’ northern region, for instance, nonland costs averaged $296 per acre from 2003 to 2007, according to the University of Illinois. Those costs rose to an average of $416 in 2008, and were projected to be $579 per acre this year— nearly double the average of two years prior.

Input costs for 2009 did drop back after that Illinois survey last fall. Still, costs are much higher than a few years ago. Overall, according to University of Illinois economist Gary Schnitkey, cash rents in the state for 2009 increased an average of $10 to $15 per acre.

Extreme gaps

More striking to Schnitkey was the fact that “we actually see quite a lot of variability in what people pay for rent on the same quality land,” he said. “Knox County has just as good farmland as Sangamon [the highest average rent in the state at $224 per acre]” but rented for an average of $179 per acre in 2008—20 percent less than the county to the south.

Some of that differential, according to Schnitkey, could be the concentration of very low-cost, large operators fighting for every piece of land that becomes available.

That competition also may play a role in a larger percentage of flat cash rents, as opposed to flexible rents or crop share rents, in areas where the pressure for more land is more intense.

Harold Winship is a farm manager based in Galesburg, IL, in Knox County. Admittedly, most of his clients are involved in flexible cash rents or crop share rents as opposed to straight cash rents.

“I don’t have a lot of high cash rents, but we haven’t gone that route,” said Winship. “I can’t pick a price and feel good about sticking it to somebody one year then not taking enough the next.” The variable cash rents might be based on a farm’s production that year coupled with market prices, or it might be based on the price at which the tenant actually sells the grain.

In 2008, one of Winship’s clients had a tenant whose corn yield was more than 235 bushels per acre. The base rent for the parcel was $240 per acre. The tenant was able to pre-sell most of that crop for more than $5 per bushel in the spring and early summer. Based on the formula in the rental agreement, the tenant’s gross income was such that he owed the landlord an additional $50 per acre. “We would never have gotten that tenant to agree to a cash rent of $290 per acre prior to the season,” said Winship. But with the way the year went, “he didn’t have any problem writing that check for an additional $50 per acre.” — DTN