Who's really jacking up rents?
Cash rent auctions in the $400-an-acre-and-up range have made headlines in the farm press the past two seasons. But that’s not indicative of what operators pay when they blend costs from all rental parcels, crop-share leases and owned land into a total-farm average. Only a handful of corn and soybean operators averaged 2011 land expenses over $300/acre on their entire operations, so big spenders were the exception rather than the rule, an analysis of cash rents paid by clients of the Brighton, IL, consulting firm AgriSolutions shows.
What’s more, corn-growerland costs are relatively size neutral, with megafarms over 10,000 acres averaging only slightly less than farms in the 1,000-acre range, AgriSolutions financial consultant Sam Bachman said.
The AgriSolutions database includes more than 300 farms from more than a dozen states. Where farmers own the land they operate, AgriSolutions asked operators to report a market value cash rent so they could be benchmarked against their peers.
The bad news is that this year-end snapshot understates what growers likely paid for the 2012 droughtimpaired crop. Recent lender surveys show cash rents spiked rapidly in 2012, so operators are likely paying much more than indicated here. Farmland cash rental rates in 2012 climbed 17 percent from 2011 for the states in the Chicago Federal Reserve District—the second-largest increase in the history of the survey. Cash rental rates for agricultural land went up 15 percent in Illinois, 15 percent in Indiana, 20 percent in Iowa, 12 percent in Michigan, and 19 percent in Wisconsin.
Where rents are headed after 2012’s drought is anyone’s guess, but after the Great Drought of 1988, Chicago Federal Reserve District rents jumped 5 percent in 1989. After massive Midwest spring flooding in 1993, they edged up 2 percent the fol lowing year. Only during the Credit Crisis years of the 1980s did renters find much relief from rental hikes when rates tumbled five consecutive years from 1983 to 1987.
“The land rent issue is clouded by owned acres and dozens of different crop-share arrangements. But the cash rents paid by growth-minded operators in recent years clearly indicate that underlying it all, land rent is the single greatest production expense and therefore must be closely managed,” Bachman said. “Our experience is that rents exhibit hysteresis—they lag fundamental changes in the economics of crop production by a year.
“My personal opinion is that the 2012 drought is not a fundamental economic change and that high commodity prices will make it hard for producers to convince landowners that lower rents are justified. Expect rents to remain high because yield potential and commodity prices remain high in historical context.” — DTN