Does It Pay to Farm Every Acre you Own?

April 12, 2019 01:12 PM
 
In most areas, average operator returns exceed rental returns for farmland. But, with recent declines in crop prices and farmer profitability, the scales are tipping in some areas.

In most areas, average operator returns exceed rental returns for farmland. But, with recent declines in crop prices and farmer profitability, the scales are tipping in some areas. That’s according to recent analysis from Farmer Mac economists in their quarterly newsletter, The Feed.

“One of the things we took a look at in this most recent edition of ‘The Feed’ was that difference between return for operators and returns for landlords if you rent out your ground,” says Jackson Takach, Farmer Mac economist. “Are you going to actually make more money than if you planted a crop to it?”

To find this answer, the economists studied income and rental trends. Look at the pattern of inflation-adjusted net operating income (NOI) per acre over time. You see the predictable jumps and dips over time.

 

NOI by region 
 
The interesting trends are on a regional basis:

  • Corn Belt: Average profitability swelled in 2012 due to drought, high grain prices and crop insurance payments. But since 2012, average NOI has fallen by more than $100 per acre. The inflation-adjusted NOI in Illinois peaked in 2012 at more than $440 per acre (6.6% of average land values in the state) but hit just $223 in 2017 (3% of average land values). 
  • Western: NOI for Western agriculture has increased significantly since 2007 due to an increase in consumer preference for fruits, vegetables, and particularly nuts. In California, inflation-adjusted NOI peaked in 2013 at $723 per acre (9.9% of average land values) and had only fallen to $622 per acre in 2017 (7.1% of average land values). 
  • Plains: Overall, NOI has been lower than in other areas, primarily due to lower yields and greater land use for pasture. 
  • Eastern: Farmland has experienced stable NOI returns for operators, keeping pace with inflation.

Now, take a look at this map, which plots each state’s average real operating profit against its average after-tax cash rental return from 1994 to 2017. The size of each bubble is related to the total value of agricultural real estate in the state. 

operator returnsversus landowner returns
 
Most states fall near the middle, where operating returns are near or slightly higher than rental returns. Southeastern states like Florida, Georgia and North Carolina tend to have lower rental rates, while Mountain and Plains states like Idaho, Colorado and Arizona tend to have higher rental rates. States with a higher percentage of their cash receipts tied to permanent crops like these tend to have higher returns (ex: California).

“Lately in the Midwest, the rental returns have started to exceed those of the operating returns,” Takach says. “But that margin has really shrunk.”

For example, the real operator returns in Corn Belt states averaged more than 2.5% higher-than average real after-tax rental returns from 2008 to 2013. Since 2013, cash rents in the Corn Belt increased, and the gap between operating rates and rental returns narrowed and even inverted for some states in 2016 and 2017. 

This profit squeeze means farmers should have proactive conversations with their landlords, Takach recommends. “Maybe that rental rate has to come down a little bit in order to make it all work for the operator and the landlord.” 

Average rental returns offer lower volatility compared to operating returns, according to the report. But that also limits upside potential from year to year as increases in NOI are absorbed into rental rates over several future periods.

To subscribe to The Feed, produced by Farmer Mac, visit www.farmermac.com/thefeed.
 

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Comments

 
Spell Check

Steve
Lubbock , TX
4/13/2019 06:12 PM
 

  Really Phil? Lisa gets it but farmers don’t. No one is holding you to the silly notion that US farmers have to provide food to the world. Particularly Trump. It’s the greed gene at work. Unfortunately in the US today no one is going to save you from yourselves. Will consumers eventually have to pay more when a bunch of farmers go bankrupt. Maybe, but that’s how the capitalist system works.

 
 
Murray Gingrich
Pentwater, MI
4/14/2019 09:30 AM
 

  Interesting article. I've worked for large sucessful farmers for 35 years. I can say with 100% accuracy that the banks have it wrong. Farmers in west central Indiana have the highest costs of anyplace I have clients. The average cash rent is $250.00 to 350.00 Per acre. Fertilizer is to high along with seeds and chemicals. The same corn seed my clients plant cost a Brazilian farmer 60% less. Why? In 2011 fertilizer was 380.00 per ton. Today the futures market is trading lower than in 2011 for matural gas yet fertilizer is 50 ton higher. Machinery is off the charts even though most of it is made in China. In 1988 there was a financial disaster in Agriculture. If things do not turn around price wise many farmers will be finished this year. Banks have not helped. Every year since 2014 they loaned farmers money to plant corn. The bankers I know I asked them not to loan money for a corn crop. This plea fell on deaf ears. They are only concerned about getting more equity than any other business and charge higher interest rates. Why? If you want a Business Degree farm for five years. Last but not least, Cme trades 41 times more contracts than farmers raise. Odds in Vegas are better.

 
 
Son-of-Butch
Plato, MN
4/22/2019 06:44 PM
 

  It seems to be saying if you rent out your land and can also land a job as a Wal-Mart greeter, it's a no brainer, you'll better off than farming it yourself.

 
 

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