Minding Ag's Business

Fat-Cat Rents Most Vulnerable

Annual change in cash rents on average quality Indiana farmland shows what goes up rarely comes down much. source: Brent Gloy, Purdue farmland survey

Former Purdue University economist Brent Gloy is weighing in on any potential cash rent crash for 2015. Since he headed back to his western Nebraska home farm this spring, he's become an academic with real skin in the game, so to speak. He emailed me to share his analysis showing that statewide-average cash rents rarely slide much in any given year. It's those cut-throat, top-of-market leases bid up at cash corn's $6.89 season-average peak in 2012 that stand to see the biggest adjustments.

(Of course everyone's ability to pay is drastically reduced under all scenarios the past two years. DTN's current national average cash prices are now running closer to $3.43--a potential gross revenue reduction of $600/acre or more on good corn ground.)

But renters shouldn't get their hopes up. From 1976 to 2013, cash rents on "average" quality Indiana farmland reported in Purdue's land survey rarely moved more than 10% per year.

"It is also obvious that rents do go down, but usually not very much or very often," Gloy found. "Over these 38 observations, there were nine instances when cash rents declined. Of those declines, five were greater than 5% and only one was greater than 10% (1986). It is important to note that when rents overshoot, the adjustment period can take several years to correct and can be substantial. This is the case for the declines that occurred in succession from 1982 to 1987.Together, from 1981 to 1987, a period widely regarded as the U.S. farm financial crisis, cash rent fell by 32%."

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"I am pretty skeptical that rents are going to change dramatically next year but I would expect it see some softening," Gloy also told me. "The people that paid the really high rents $400+ will probably try to get out and I doubt the landlord will find anything close to those rates. In terms of state averages it will take some time for them to work lower. Even in the 80s that was about a four-year trip downward."

In another post on farmdoc.com this week, University of Illinois' economist Gary Schnitkey agreed that it's the above-average rates that stand the best chance of correction in 2015. In any cash rent survey, you can find $100/acre ranges between nearly identical farms, so it's those at the top that appear more vulnerable.

Between 2006 through 2013, Schnitkey points out that average cash rents increased in Illinois by an average of 7.7% per year. "This means that the average cash rent is 68% higher in 2013 as compared to 2006," he wrote. "If the cash rent on a farm has lagged these increases, there may be rational for keeping the cash rent high into 2015."

It's tricky to be fair in these negotiations, but Schnitkey believes how well growers shared profits in the good years will influence how willing landowners will be to share the pain in 2015. He uses a farm with a 200-bu. expected corn yield that had a cash rent of $179 per acre from 2006 through 2012. If the cash rent then increased to $300 per acre in 2013, stable rents in 2015 could be justified because the landowner did not get as much return in 2006 through 2012, he wrote, even though the farmer likely will face a loss.

One area where I'm already seeing rate resistance are on institutionally managed farms, the kind backed by family wealth offices and other well-heeled investors that jumped on the farmland investment bandwagon since 2008. These institutional owners promised annual returns of 5% or more on their investments, but may have trouble eking out those profits if they overpaid for land. One tenant I know walked away from a 6,000-acre Midwest rental this season after the institutional owners didn't budge following 2012 and 2013 crop disasters. A real key for 2015 will be whether "flex" leases frequently used by investors really do flex lower when prices collapse--not just keep base rents high in bad years and add flex bonuses in good years.

See Gloy's comments at


See Schnitkey's latest cash rent comments at


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