Cash rental rates fall for a third consecutive year in Iowa
A 2016 survey shows that cash rental rates for farmland in Iowa fell by 6.5 percent in 2016, accumulating a 14.7 percent decline since 2013. Despite falling for a third consecutive year at an increasing rate, the average cash rent in 2016 is the fifth highest on record (Figure 1).
Iowans supplied 1,585 responses (10 percent higher than last year) about typical cash rental rates in their counties for land producing corn and soybeans, hay, oats and pasture. Of these, 47 percent came from farmers, 25 percent from landowners, 14 percent from agricultural lenders, 12 percent from professional farm managers and realtors, and 2 percent from other professions. Respondents indicated being familiar with a total of 2.5 million cash rented acres across the state.
AgDM File C2-10, Cash Rental Rates for Iowa 2016 Survey provides detailed results by county and crop. There was considerable variability across counties in year-to-year changes, as is typical of survey data, but 85 counties experienced declines in average rents for corn and soybeans. The report also shows typical rents for alfalfa, grass hay, oats, pasture, corn stalk grazing, and hunting rights in each county and district.
Survey shows decline in all districts
The survey was carried out by Iowa State University Extension and Outreach. Statewide, reported rental rates for land planted to corn and soybeans were down from $246 per acre last year to $230 in 2016, or 6.5 percent. This is equivalent to about three-quarters of the change in Iowa farmland values over the past 12 months reported in surveys conducted by the Iowa REALTORS Land Institute and summarized in AgDM File C2-75, Farmland Value Survey (REALTORS Land Institute). The 14.7 percent accumulated decline in rental rates since 2013 is aligned with the 12.4 percent decline in land values reported in the 2015 Iowa Land Value Survey published by the ISU Center for Agriculture and Rural Development (AgDM File C2-70, Farmland Value Survey).
Different regions experienced different declines in cash rents: from 2.2 percent in Crop Reporting District (CRD) 7 to 8.2 percent in CRD 3 (Figure 2). Northern and Central Iowa (CRD 1-6) continue to have higher cash rents than Southern Iowa (CRD 7-9).
Rents for high quality land rents declined the most
Not all land qualities have seen their cash rents decline proportionately. High quality land experienced a 7.5 percent decline, from $292 per acre in 2015 to $270 in 2016, accumulating a 17.7 percent decline since 2013.
Medium quality land experienced a 6.9 percent decline, from $247 per acre in 2015 to $230 in 2016, accumulating a 14.8 percent decline since 2013.
Low quality land experienced a 5 percent decline, from $200 per acre in 2015 to $190 in 2016, accumulating a 10 percent decline since 2013.
Setting rents for next year
Survey information can serve as a reference point for negotiating an appropriate rental rate for next year. However, rents for individual farms should be based on productivity, ease of farming, fertility, drainage, local price patterns, longevity of the lease, and possible services performed by the tenant.
Two major factors with the potential to influence future cash rents are crop prices and land values. Corn and soybean prices received in Iowa peaked in August 2012 at $7.90 and $16.80 per bushel, respectively. In March 2016, corn and soybean prices were $3.5 0 and $8.50 per bushel, respectively, and have accumulated a 55.7 percent and 49.4 percent decline from their peak values (Figure 3). Due to current and projected low crop prices, profit margins in corn and soybean production on cash rented acres are expected to remain very tight or negative, and most operators will likely attempt to negotiate lower rents to cash flow the operation.
The second major factor affecting cash rents is the return on investment for landowners. Figure 4 shows the evolution of the ratio of average cash rents to average land values in Iowa. It suggests that the average return on investment for landowners who cash rent their land to operators has followed a declining trend since the early 1990s, and it has stabilized at around 3 percent after 2010. Note that this ratio does not measure net returns because ownership costs, such as real estate taxes, are not taken into account in its calculation. However, it is indicative that landowners (whose goal is to obtain a reasonable rate of return on their real estate assets) will likely be reticent to accept lower cash rents in the future. If land values continue to decline and the rate of return to comparable assets remains stable, then a stable ratio might be consistent with lower cash rents.
Other resources available for estimating a fair cash rent include the AgDM Information Files Computing a Cropland Cash Rental Rate (C2- 20), Computing a Pasture Rental Rate (C2-23) and Flexible Farm Lease Agreements (C2- 21). All of these fact sheets include decision tools (electronic spreadsheets) to help analyze individual leasing situations.
For questions regarding the cash rent survey, contact the authors. For leasing questions in general, contact a farm management field specialist, www.extension iastate.edu/ag/farm-management-0.
Alejandro Plastina, extension economist, 515-294-6160, firstname.lastname@example.org