Farmland rent-past, present and future
Part one in a four part series on land rent.
Farmers rely on renting farmland in order to maintain and/or expand their land base which is key to a farms overall viability. Over the past ten years farmland rental rate have risen to record levels that where for the most part supported by increases in commodity prices. As commodity prices are now trending lower farm producers are faced with less income to support the rents paid over the past few years. Making adjustments to current crop costs of production are vital for a farms overall success.
From 2000-2007, land rent in the United States was fairly stable. Since then, prices have increased 43 percent from $97.21 in 2007 to $172.63 per acre in 2014. During the same time period, the national average corn price went from $3.39 in 2007 to a peak of $6.67 in 2012, and then sharply dropped to $4.11 in 2014. Soybean prices have mimicked corn prices. Projected crop prices for the next five years show slow, but steady growth, with corn having a slight advantage over soybeans. When crop prices were high, farmers bid up land rent prices because they could afford to do so. Now that we are in a downtrend or adjustment phase in the market, the ability of farmers to pay the same level of land rent will decline.
From the chart in Figure 1, you will also note that land rent prices in Michigan tend to be lower than the national average by about $50 per acre. It is important to remember that land rent prices vary tremendously from county to county throughout Michigan. Generally, the higher productivity soils that are tile drained in areas where specialty crops are grown (such as sugar beets and vegetables) tend to command a higher price. Other factors such as field size, access, soil type, soil fertility, previous cropping history, fencerows, telephone poles, wet spots, and proximity to their farm operation all impact the price that farmers are willing and able to pay for land rent. Looking at data like this will give you a place to start, but may not reflect the true value of the farmland. Selected county level data can be found in the 2014- 2008 USDA Farm Land Rental Summary for Select Counties.
According to the National Agriculture Statistics Service, the average land rent price across Michigan is $123 per acre. The same database contains county level data, which would be an even more accurate reflection of rental rates in your area. Michigan is very diverse from north to south. Land rent in southern Michigan is much higher than in the Upper Peninsula. Many farmers are making improvements to the land including installation of tile drainage, removing fencerows and installing irrigation systems. All of these improvements lead to higher long term yields which help the support higher land rental rates. With lower commodity prices, you can expect that over the next 3-4 years the amount of money invested in these improvements paid for by the farm producer will taper off. However, landowners that are looking to maintain their current land rental rates may want to consider making an investment to improve their farm land.
So what does the future hold for land rent? Farmers will want to hold onto the land they farm as long as possible. It is hard to make a living if you don’t have any land to farm. If the prices hold for the next year or two, Michigan State University Extension would expect that farmers will need to re-negotiate with landowners about their price and type of rental contract being used. The recent volatility in commodity prices generates an additional risk. Farmers may want to share some of that risk with landowners, so that when crop prices are good, rental prices reflect that, but when prices are down, rental prices go down. There are some options for different types of agreements that allow some flexibility in pricing land rent. It is expected that in the future the number of these types of agreements will increase.
The MSU Extension Farm Management Team has a website with many resources to help landowners and farmers determine and negotiate terms for land rent.
Other articles in this series:
- Projected commodity prices impact farms margins and rent