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Slight increases in cash rental rates in Iowa

pdf fileAgDM Newsletter
May 2020

The most recent annual survey of cash rental rates for Iowa farmland shows that rates increased, on average, by 1.4% in 2020 to $222 per acre. This is the fourth year of relatively stable rates at levels around 18% lower than the historical peak reached in 2013 at $270 per acre (figure 1). In comparison, corn and soybean prices received by farmers in Iowa declined by 49% and 45%, respectively, since mid-2013.

Iowans supplied 1,592 responses about typical cash rental rates in their counties for land producing corn and soybeans, hay, oat, and pasture. Of these, 43% came from farmers, 32% from landowners, 13% from professional farm managers and realtors, 6% from agricultural lenders, and 6% from other professions and respondents who chose not to report their status. Respondents indicated being familiar with a total of 1.6 million cash rented acres across the state.

figures 1 and 2

AgDM File C2-10, Cash Rental Rates for Iowa 2020 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 59 counties experienced increases in average rents for corn and soybeans. The report also shows typical rents for alfalfa, grass hay, oat, pasture, corn stalk grazing, and hunting rights in each district.

Survey shows declines in increases 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 up from $219 per acre last year to $222 in 2020, or 1.4%. This percent increase is about 1.5 times the increase in Iowa farmland values between March 2019 and March 2020 reported in surveys conducted by the Iowa REALTORS Land Institute and summarized in AgDM File C2-75, Farmland Value Survey (REALTORS Land Institute).

However, the 17.8% accumulated decline in rental rates since 2013 is in line with the cumulative 14.7 percent decline in land values over the same period reported in the Iowa Land Value Survey published by the ISU Center for Agriculture and Rural Development or AgDM File C2-70, Farmland Value Survey.

Different regions experienced different changes in cash rents: from a 4.6% increase in Crop Reporting District (CRD) 3 to a 2.4% drop in CRD 9 (figure 2). Northern and Central Iowa (CRD 1-6) have, on average, 21% higher cash rents than Southern Iowa (CRD 7-9).

Rents for low quality land increased the most

Not all land qualities have seen their average cash rents increase proportionately. High quality land experienced a 0.4% increase, from $256 per acre in 2019 to $257 in 2020.

Medium quality land experienced a 1.4% increase, from $220 per acre in 2019 to $223 in 2020.

Low quality land experienced a 2.7% increase, from $183 per acre in 2018 to $188 in 2020.

Some renegotiations expected

Federal government payments from the Market Facilitation Program (MFP), and expectations of higher soybean exports to China by the time most cash rents were set (last September) were major factors supporting slightly higher cash rents for 2020 amidst stable to declining crop prices. However, as of May 2020, the implementation of the Phase 1 agreement between the United States and China is still under discussion; the coronavirus pandemic has brought worldwide economic activity to a brink of a protracted recession; and plummeting oil prices slashed the demand for biofuels. The resulting economic damage for Iowa in 2020 from this perfect storm has been estimated at roughly $788 million for corn, $213 million for soybean, over $2.5 billion for ethanol production losses and $347 million in losses due to falling ethanol prices, $658 million for fed cattle, $34 million for calves and feeder cattle, and $2.1 billion for hogs (CARD Policy Brief 20-PB).

The federal government has implemented multiple efforts to provide a temporary lifeline to the farm sector through the Coronavirus Food Assistance Program (CFAP), the Paycheck Protection Program (PPP), the Economic Injury Disaster Loan (EIDL), the Economic Impact Payment (EIP), and other programs authorized by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) (See COVID-19 Resources compiled by the ISU Center for Ag Law and Taxation). However, these valuable programs are not expected to make corn and soybean farmers whole, and the current outlook suggests that some farmers would likely struggle to honor the 2020 cash rental rates agreed upon back in September 2019. As a result, some renegotiations are to be expected.

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, and they both suggest that absent any major change in the current outlook, cash rents might decline in 2021. Corn and soybean prices received in Iowa peaked in August 2012 at $7.90 and $16.80 per bushel, respectively. In March 2020, corn and soybean prices received by farmers in Iowa averaged $3.64 and $8.43 per bushel and have respectively accumulated a 54% and 50% 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 to negative for a seventh consecutive year, and tenants will likely be using profits generated in owned land to cover any negative profit margins on rented land.

figure 3

figure 4

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% 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 unless land values continue to decline. However, in a scenario of historically low and possibly declining interest rates, the opportunity cost for landowners would decrease and even lower rates of return on farmland might become acceptable.

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 are on the Ag Decision Maker Leasing page, including 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 in your area.

An online tool to visualize the cash rents by land quality in each county by year, and compare trends in cash rents for a county versus its CRD and the state average is available.

 

Alejandro Plastina, extension economist, 515-294-6160, plastina@iastate.edu