The rental rates for farmland are expected to rise across the U.S. in 2013, partly due to higher crop demand and rising commodity prices.
As the total amount of farmland across the country slowly shrinks, according to the USDA’s 2007 Census of Agriculture, the value of the remaining farmland has increased, due in part to higher crop demand and rising commodity prices, particularly in the aftermath of the massive drought that hit much of the country in 2012.
Landowners are responding by raising farmland rental prices, and the projected 2013 values are on track to exceed the record highs of 2012. Dennis Stein, farm-business-management educator for the Michigan State University Extension, says that farmland rental rates have increased an average of 30 percent or more between 2008 and 2012.
"We are seeing that the 2011 numbers increase for 2012 and will continue [to do so] into early 2013 as farm incomes continue to increase,” Stein says.
Despite the projected 2013 rental rate increase, some renters will see either no change or potentially even a decrease in rent.
"The farms that will see lower numbers will be those farms that are entering into multi-year agreements during 2013, as we are now facing major changes in the future commodity market prices,” Stein notes. "These changes in future market prices will force some farms to readjust land rents being offered to stay profitable.”
Land rental rates are influenced by three primary factors: commodity prices, weather conditions and national farmland value. Because of 2012’s adverse weather conditions, national commodity prices for three major crops rose dramatically, though they are currently on a slight decline.
"Farm commodity prices that are currently being offered for corn, soybeans and wheat are 25 to 30 percent lower than those farms have been receiving the last several months,” Stein says.
Additionally, most states across the country have seen an increase in farmland value between 2011 and 2012, while some New England and southeastern states have either seen no significant change or a decrease in land value, according to the USDA’s annual Land Values Summary. The Farm Bill, which Congress recently gave a 9-month extension as part of its fiscal cliff negotiations at the end of 2012, also has the potential to affect farmland rental rates, depending on the creation and passage of a new bill in 2013.
Stein advocates farm operators and landowners to enter into a flex rental arrangement, which accounts for fluctuating market values and uncertain crop yields by determining a rental cost after a crop is harvested.
"Flex rents allow for the [establishment] of a fair base land rental value that both the landowner and farm operator can live with, adding in a formula that would allow for the rental payment to increase if the 2013 crop comes in with a [higher-than-expected] gross income,” he says.
He also advises farm operators and landowners that the projection rate increase does not necessarily mean that individual rent agreements have to spike.
"No trend changes everyone at the same time, and that is true with land rents and land values,” he says.
The 2012 USDA Census of Agriculture, which recently had its initial Feb. 4, 2013, deadline extended to allow for more responses, will provide additional data for future rental rate projections once the findings are released. Farmers who earned or had the potential to earn at least $1,000 from their farming operations were required by law to fill out the census.