Chart Credit: Brent Gloy
Currently, the value-to-rent multiple is near all-time highs for most areas of the corn-belt. For example, according to the USDA, average quality cropland in Iowa now sells for roughly 29 times its cash rental rate. Similar multiples hold for Indiana and Illinois. In other words, buyers are willing to pay roughly $30 for each dollar of current gross cash rental income.
In April of this year, I did a comprehensive review of crop rental rates and cash leases practiced in the Midwest. There is a huge variability and many unique situations require unique and appropriate rate solutions.
The post, Comprehensive Update on Farmland/Cropland Cash Rent Rates for the Midwest, was promoted on Twitter by the Chicago Federal Reserve Bank, a nice endorsement.
Today, as farmland owners are beginning to rethink next year’s deals, I thought I’d re-post the link.
As for farmland prices continuing their rapid increase in value, these are still relatively safe at today’s levels so long as policy continues to ensure returns by way of mandated corn use for ethanol as planned, the existing crop insurance program, and quantitative easing by our central bank. The low interest rate environment has been key in both today’s farmland prices and the stability of these prices. Current policy is why “cornbelt” farmland prices have gone up more rapidly than other types of farmland this past decade.
Chart Credit: Brent Gloy
This graphic shows the net returns to farm operators plus rent paid to non-operator landlords and interest payments, which is a measure of the return to productive assets, unpaid labor and management. Interest expense and rents are added back because they are a component of the returns to debt and land owned by non-operators.
As you can see in the above graph, today’s strong Ag commodity prices are helping to support the price of farmland and rents. But, these same strong prices are promoting production around the world which could over time lessen demand. Growing demand created by biofuels policies and politics make that unlikely, however.
Another down-side risk to Ag commodity demand is the advancing global economic recessionary condition. Plus, the rapid ascent of farmland prices in recent years has many worried that it is resemblant of a “bubble”.
Finally, the sudden change in global corn use and demand created by our U.S. policy and recent drought continues to adjust in the markets. The U.S. is losing corn export market share —this year the lowest in 40 years— as we are becoming less competitive on the global market, livestock and dairy producers are reducing production which is decreasing corn demand, consumers are decreasing meat consumption due to higher costs, and other crops such as wheat are being substituted by Japan and other corn importing nations in response to these current high corn prices. Newly established market patterns can be difficult to win back, once begun. These are all factors that will influence U.S. cornbelt farmland prices as we go forward — and rental rates.
NOTE that there is an upcoming meeting Nov. 27th sponsored by the Chicago District Reserve Bank on latest rental rates. Prior to the meeting, they have announced “The 2012 cash rents for Midwestern farmland increased 17% from a year ago, according to the latest Chicago Fed survey.”