Editor’s note: The following was written by Alejandro Plastina, Iowa State University Extension economist, for the university’s Ag Decision Maker May 2019 newsletter.
The most recent annual survey of cash rental rates for Iowa farmland shows that rental rates decreased on average by 1.4% in 2019, eroding the increase in rents from the previous year and marking the fifth year of declining rates from the historical peak at $270 per acre in 2013.
The average cash rent at $219 in 2019 is still higher than the average rate in 2011, and only 18.9% lower than in 2013. In comparison, corn and soybean prices received by farmers in Iowa declined by 50 and 45%, respectively, since mid-2013.
There was considerable variability across counties in year-to-year changes, as is typical of survey data, but 65 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 district.
Declines in most 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 $222 per acre last year to $219 in 2019, or 1.4%. This percent decline is equivalent to about half the decline in Iowa farmland values between March 2018 and March 2019 reported in surveys conducted by the Iowa REALTORS Land Institute.
However, the 18.9% accumulated decline in rental rates since 2013 is in line with the cumulative 16.7% decline in land values over the same period reported in the Iowa Land Value Survey.
Different regions experienced different changes in cash rents: from a 3.4% increase in Crop Reporting District (CRD) 9 to a 2.7% drop in CRD 2. Northern and Central Iowa (CRD 1-6) continue to have higher cash rents than Southern Iowa (CRD 7-9).
Not all land qualities have seen their cash rents decline proportionately:
- High-quality land experienced a 1.2% drop, from $258 per acre in 2018 to $255 in 2019.
- Medium-quality land experienced a 1.8% drop, from $223 per acre in 2018 to $219 in 2019.
- Low-quality land experienced a 1.1% decline, from $185 per acre in 2018 to $183 in 2019.
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 2019, corn and soybean prices received by farmers in Iowa average $3.57 and $8.46 per bushel and have respectively accumulated a 55% and 50% decline from their peak values.
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, and tenants will likely be using profits generated in owned land to cover any negative profit margins on rented land.
The second major factor affecting cash rents is the return on investment for landowners. The evolution of the ratio of average cash rents to average land values in Iowa 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.
Furthermore, in a scenario of increasing interest rates, the opportunity cost for landowners would increase and pressure would mount to increase the asking price for renting their land out.
Iowans supplied 1,262 responses about typical cash rental rates in their counties for land producing corn and soybeans, hay, oats and pasture. Of these, 47% came from farmers, 30% from landowners, 12% from professional farm managers and realtors, 8% from agricultural lenders and 3% from other professions. Respondents indicated being familiar with a total of 1.6 million cash rented acres across the state.