Power Hour: Cash Rents Eclipse Early ‘80s

March 1, 2013 08:30 AM
Power Hour: Cash Rents Eclipse Early ‘80s

Despite skyrocketing farmland rents, they continue to lag behind the growth in farmland values in the heart of the Corn Belt. As early as 2007, land values rose above their previous peak in 1979 in the Federal Reserve Bank of Chicago district. But only last year did cash rents reach the high levels last seen in the early 1980s, in real terms.

The Chicago Fed, or the Seventh District, includes the states of Illinois, Indiana, Iowa, Michigan and Wisconsin.

This shift to cash rents, the most dominant form of leasing, has been driven by the rise of larger farms with multiple landlords, complex record-keeping requirements, large equipment needs, and less labor per acre. The March Letter reports on a recent farmland leasing trend conference.

The distribution of farms under management by the Farmers National Company (one of the nation’s largest firms servicing farmland owners) breaks out this way: 44% cash rent; 36% crop share, and 20% on custom or blended arrangements. Many farmland investors find custom farming an attractive avenue, since it offers the best possible returns, the Fed says. In addition, blends of various types of leases have become more popular as farmland owners and operators attempt to tailor the risk and reward profiles of their particular interests.

Farmers in the Chicago Fed district own 49% of acres in production, while they lease 38% of them and farm 13% on a sharecropping basis, according to a 2011 USDA survey. Large commercial farms tend to lease land more than intermediate and small farms, especially in the Chicago Fed district.

Commercial farms averaged four leases per farm in the district. To gain from higher crop prices of recent years, farmland owners have increasingly used cash leases with bonus payments when certain crop price and output conditions are met, the publication says.

According to Illinois Farm Business Management Association data, cash rents account for 55% of acres farmed in the state; the data also reveal that Illinois has a larger proportion of crop share rents, 27%, than found nationwide. Cash rental agreements in Illinois tend to be for one year, with fewer longer-term leases being granted than in the past. Another trend for cash rents, the Chicago Fed says, is to require a single upfront payment, instead of one payment in the fall and another payment in the spring. Leases increasingly have requirements for soil testing or fertilizer applications.

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