Minding Ag's Business
Marcia Zarley Taylor DTN Executive Editor

Thursday 07/24/14

Fat-Cat Rents Most Vulnerable

Annual change in cash rents on average quality Indiana farmland shows what goes up rarely comes down much. source: Brent Gloy, Purdue farmland survey

Former Purdue University economist Brent Gloy is weighing in on any potential cash rent crash for 2015. Since he headed back to his western Nebraska home farm this spring, he's become an academic with real skin in the game, so to speak. He emailed me to share his analysis showing that statewide-average cash rents rarely slide much in any given year. It's those cut-throat, top-of-market leases bid up at cash corn's $6.89 season-average peak in 2012 that stand to see the biggest adjustments.

(Of course everyone's ability to pay is drastically reduced under all scenarios the past two years. DTN's current national average cash prices are now running closer to $3.43--a potential gross revenue reduction of $600/acre or more on good corn ground.)

But renters shouldn't get their hopes up. From 1976 to 2013, cash rents on "average" quality Indiana farmland reported in Purdue's land survey rarely moved more than 10% per year.

"It is also obvious that rents do go down, but usually not very much or very often," Gloy found. "Over these 38 observations, there were nine instances when cash rents declined. Of those declines, five were greater than 5% and only one was greater than 10% (1986). It is important to note that when rents overshoot, the adjustment period can take several years to correct and can be substantial. This is the case for the declines that occurred in succession from 1982 to 1987.Together, from 1981 to 1987, a period widely regarded as the U.S. farm financial crisis, cash rent fell by 32%."

"I am pretty skeptical that rents are going to change dramatically next year but I would expect it see some softening," Gloy also told me. "The people that paid the really high rents $400+ will probably try to get out and I doubt the landlord will find anything close to those rates. In terms of state averages it will take some time for them to work lower. Even in the 80s that was about a four-year trip downward."

In another post on farmdoc.com this week, University of Illinois' economist Gary Schnitkey agreed that it's the above-average rates that stand the best chance of correction in 2015. In any cash rent survey, you can find $100/acre ranges between nearly identical farms, so it's those at the top that appear more vulnerable.

Between 2006 through 2013, Schnitkey points out that average cash rents increased in Illinois by an average of 7.7% per year. "This means that the average cash rent is 68% higher in 2013 as compared to 2006," he wrote. "If the cash rent on a farm has lagged these increases, there may be rational for keeping the cash rent high into 2015."

It's tricky to be fair in these negotiations, but Schnitkey believes how well growers shared profits in the good years will influence how willing landowners will be to share the pain in 2015. He uses a farm with a 200-bu. expected corn yield that had a cash rent of $179 per acre from 2006 through 2012. If the cash rent then increased to $300 per acre in 2013, stable rents in 2015 could be justified because the landowner did not get as much return in 2006 through 2012, he wrote, even though the farmer likely will face a loss.

One area where I'm already seeing rate resistance are on institutionally managed farms, the kind backed by family wealth offices and other well-heeled investors that jumped on the farmland investment bandwagon since 2008. These institutional owners promised annual returns of 5% or more on their investments, but may have trouble eking out those profits if they overpaid for land. One tenant I know walked away from a 6,000-acre Midwest rental this season after the institutional owners didn't budge following 2012 and 2013 crop disasters. A real key for 2015 will be whether "flex" leases frequently used by investors really do flex lower when prices collapse--not just keep base rents high in bad years and add flex bonuses in good years.

See Gloy's comments at

http://ageconomists.com/…

See Schnitkey's latest cash rent comments at

http://farmdocdaily.illinois.edu/…

Follow me on Twitter@MarciaZTaylor

Posted at 11:46AM CDT 07/24/14 by Marcia Zarley Taylor
Comments (7)
Can someone out there tell me what I am missing!I just read land sales in Progressive Farmer How are these guys going to pay for 13000 dollar an acre ground?I look at after taxes,all expences and depreciation you may clear 100.00 per acre on payed for land.So how do you make payments of that size, it would take 130 years to pay for it with no interest.Do they not figure in cost of living.
Posted by Raymond Simpkins at 8:53AM CDT 07/29/14
corn is at a 100-150 loss on my cash rent ground, can't take that kind of loss again
Posted by Unknown at 6:59AM CDT 07/30/14
Question Marcia. When referencing cash rent- Do the whiz kids actually use average cash rent or median cash rent? Example: 1,000 acres @ $100.00 /acre and 100 acres @ $1,000.00/acre is $550.00 median rent. The average, on the other hand is about $182.00 per acre using the same #'s.
Posted by Bonnie Dukowitz at 9:11PM CDT 07/30/14
Money solves all problems! If someone has the money they can rent or buy land at whatever value - just because they can, they have the cash. If someone does not the money they can't rent or buy land at high or reduced values - just because they can't, they don't have the cash. This is a fact of history and most current economists miss this important fact. During the Great Depression, in the 1980's and still today (money) makes the difference in what individuals can do. When some people suffer because of lack of money others with money can purchase assets even if buying them does not make sense. Most people do not like hearing this time honored fact of money! Put your pencils, calculators and computers away and understand what most economists miss - money solves all problems.
Posted by John Finley at 8:02AM CDT 07/31/14
John, most guys around here buying don't have cash. In fact some are in bad shape, but seem to find someone to finance them.Cash or not you wouldn't buy gold at it's highest knowing it is going to come down.
Posted by Raymond Simpkins at 11:53AM CDT 07/31/14
so the land owner is suppose to lower the rent,,,,is JD going to lower the price of a combine, is Monsanto going to lower the price of chemicals, are the employees going to take a cut in salaries on the farm, if they do, then the tenant can buy a new pick-up
Posted by Wally frey at 10:13AM CDT 08/21/14
Raymond, cash is worth zero to an investor.
Posted by Unknown at 8:48PM CDT 10/27/14
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