Farmland rental trends • farmdoc daily

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Over time, more and more farmland in Illinois is leased for cash rather than sharing. Cash lease agreements adapt more slowly to changes in farmland yields than share lease agreements. As more farmland is leased in cash, the financial position of a farm will become more closely related to the level of cash rents relative to income from farmland. This could affect farmers when cash rents are set according to income at a given time, knowing that income from farmland may decline in the future.

Types of rental contracts

Farmland owners have several standard arrangements for working with a farmer:

Fixed cash rent: A fixed cash rental agreement involves a fixed payment from the tenant farmer to the landowner. A cash lease is relatively straightforward, with significant difficulty in setting the level of rent during times when the expected returns from agriculture are changeable and very uncertain. Probably because of their relative simplicity for both the landowner and the tenant farmer, cash lease agreements are the most widely used type of lease, with the USDA estimating that cash lease agreements are used over 72 years. percent of farmland operated by non-owners in the Midwest (see link here for data).

Share the rent: A stock rental agreement involves the sharing of income and direct costs. The most common split in northern and central Illinois is 50% for the farmer and 50% for the landowner, or a 50% to 50% deal. Rental sharing arrangements are more varied in southern Illinois, with two-thirds (farmer) – one-third (owner), 60% (farmer) – 40% (owner), and 50% (farmer) – 50 % (owner) being used. The USDA estimates that stock rental agreements are used on about 18% of farmland in the Midwest (see link here for data).

Custom agriculture: In a custom farming arrangement, landowners pay farmers to perform field operations, receive all production income, and pay all direct costs. Landowners could pay farmers per field operation performed or pay a fixed fee for all field operations, including harvesting. In Iowa, the current rate for performing all field operations is $ 127 an acre for corn and $ 115 an acre for soybeans (see 2021 Iowa Farm Custom Rate Survey). Overall, relatively few acres are controlled by contract farming.

By far, stock and cash rents are the two most widely used leasing formulas, representing extremes in risk sharing during a production year. Unit rents automatically adjust up or down with yields from agricultural land. As a result, the income of the landowner is strongly correlated with the income of agricultural land. Panel A in Figure 1 shows a scatter plot of farmer and land returns – a return to the farmer before land costs are recognized – and returns to rent-sharing landowners. This data is for high productivity farmland in central Illinois from 2000 to 2020. As can be seen, there is a strong correlation between farmer and land yield and rent-sharing landowner yield. in panel A.

On the other hand, there is less relationship between the yield of farmland and average cash rents, as shown in Part C. Average cash rents have not kept up with farmers’ and farmland returns. ‘as close as the returns from rental-sharing agreements. Cash rents are set before the start of the crop year. Often times, negotiations fall behind in both situations: when yields rise and when they fall. This lag is probably due to the inertia in the evolution of returns and the difficulty of anticipating returns for the coming year. (see farmdoc every day, August 17, 2021).

Flexible cash rental terms: To partly overcome the difficulty of setting cash rents and alleviating the lagged nature of cash rents, flexible cash rents have emerged. A flexible cash rental agreement changes a cash rental agreement by varying the final rent payment in one way or another depending on the economics of the crop year. For example, the rent payment is often equivalent to a percentage of crop income, with a fixed minimum or base rent level set when income is below a set level. In northern and central Illinois, a typical arrangement is a minimum rent of $ 200, with higher rent possible if incomes are high enough that the share exceeds the minimum base level. For corn and soybeans, revenue shares of 32% and 43% are typical. The USDA estimates that less than 10% of leased farmland in the Midwest uses flexible lease agreements (see link here for data).

Flexible cash rents correspond more closely to farmland income than cash rents, but are not as responsive as shared rents. Panel B in Figure 2 shows a scatter plot of the flexible cash rents generated by a lease specified in a farmdoc Daily article from August 10, 2021. The cash rents for this flexible cash lease are less correlated with the returns of the operator and farmland than a shared rental lease: correlation of 0.77 for the flexible cash lease versus 0.97 for the shared lease. The higher correlation for the shared lease results from the fact that 1) government payments are shared in a shared rental lease but not in the typical flexible cash rents, and 2) direct costs are shared in a shared lease. sharing while they are not shared in a flexible cash lease. Flexible cash lease rents have a higher correlation with returns than with a fixed cash rent: a correlation coefficient of 0.77 for a flexible cash lease versus a correlation coefficient of 0.55 for cash rent.

Trends in agricultural land leasing

Over time, rental agreements have shifted from rent-sharing agreements to cash rental agreements. Figure 2 shows the percentage of farmland money leased by grain farms registered with Illinois Farm Business Farm Management (FBFM). The Illinois FBFM classifies leases as cash rents or shared rents, with flexible cash rents falling into the category of cash rents. Therefore, the percentage of leases not classified as cash rents in Figure 2 are classified as stock rents. For example, 49% of leases were classified as cash rents in northern Illinois in 1994, meaning the remaining 51% of leases were shared leases.

Cash rents have historically been used more in northern Illinois than in central and southern Illinois. A plausible explanation for this is that farms in northern Illinois have more livestock than those in central and southern Illinois. Livestock could make accounting for grains and other items more complex under a rent-sharing arrangement, resulting in a higher proportion of leases in the form of rent in cash.

In all regions, cash rents have increased by around one percentage point per year. In northern Illinois, cash rent usage increased from 49 percent in 1995 to 77 percent in 2000, a total increase of 28 percentage points, or an average increase of 1.1 percentage points per year. year. Similar increases have occurred in other regions: Central Illinois saw a 32 percentage point change, from 21% in 1995 to 53% in 2020, while southern Illinois saw a change of 32 percentage points. a change of 28 percentage points, from 26% in 1995 to 54% in 2020.

Most transitions to cash rents are likely to be to fixed cash rents, as other surveys suggest that flexible cash rents are a small part of the total. According to the USDA, 2014 data provides the following breakdown of the use of various rental agreements in the Midwest (see link here for data):

  • 72% are fixed cash rents,
  • 19% are shared rents,
  • 8% are flexible cash rents, and
  • 1% are free rental agreements, the terms of which are not fixed.

Implications

Over time, more and more farmland in Illinois is leased for cash rather than sharing. Several reasons can be put forward to explain this trend, the simplicity of the agreement being a major cause of the switch. For the landowner, the benefit of a cash rental agreement is that the rent is known at the time of negotiations and there is no risk of the cash rent falling due to lower yields. agricultural land. For the farmer, there is freedom in input and management decisions with a cash lease that should be entered into in conjunction with a landowner in a lease agreement.

Although simpler, cash rents do not match income from farmland as closely as those in a share rental agreement. Over time, average cash rents have lagged behind farmland yields both when farmland incomes rise and when they decline. At the very least, this translates into difficulties in setting cash rents as yields on farmland change. Rents adjusted relatively slowly to lower yields from 2014 to 2019 compared to the previous 5 years. In addition, uncertainty over whether the higher yields recorded in 2020 and expected in 2021 will continue, and for how long, also makes current decisions to adjust rental rates difficult.

Because of this lagged relationship, farmers may be reluctant to increase cash rents during periods of higher income. Rising rents can still lead to adequate income for the farmer during periods of higher income, but can lead to losses when income from farmland falls, especially if cash rents do not adjust. at lower income levels. Since cash lease agreements control a higher percentage of farmland, the lagged relationship during periods of farmland income change can lead to greater financial impacts and overall net income volatility for farmers.


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