Are Cash Rents Too High?
This article was originally published on August 25, 2006 and expired on October 31, 2006. It is provided here for archival purposes and may contain dated information.
We have been looking at cash rental rates in relationship to farm cash flow for the purpose of stimulating discussion. With a quick glance, cash rental rates seem too high when looking at the ability of the average producer to pay higher cash rent rates. However, when one looks at profitability and separate out producers who are able to keep costs low, thus in theory improving profitability, it is those producers with lower costs that can come a whole lot closer to being able to pay current levels of cash rent.
In the model for analysis, University of Illinois Extension economists looked at an average farm in Champaign County that is paying average cash rental rates. Figures from FBFM and USDA continually indicate that average cash rent in Illinois is not as high as one might assume from the coffee shop. From the USDA, the average cash rent paid in the state was $129 in 2005.
Does the landowner have the right to generate the cash rent needed to justify the investment from a cash flow perspective? The investment can be analyzed from differing perspectives. In the 1980's land values exceeded the ability of many landowners to cash flow the task of buying farm land. The farm land investment was justified on the idea that since no new land was being made, land values would continue to increase.
History tells us that this type of decision was bad for many landowners and producers. Does history in fact repeat? Good question for sure. The situation now is different. In the 1980's we didn't have the repeated high overall yields in adverse weather conditions. We didn't have 1031 exchanges driving land speculators and producers to switch from higher valued land markets to lower valued land markets. We also didn't have the crop insurance products that can protect producers today.
With this in mind, let's look at some statistics from USDA.
Year Ave. Rent Annual % Increase Ave. Land Value Annual % Increase
2001 $119 $2290 1.3%
2002 $122 2.5% $2350 2.6%
2003 $123 0.8% $2430 3.4%
2004 $126 2.4% $2610 7.4%
2005 $129 2.4% $3330 27.6%
2006 $132 2.3% $3800 14.1%
What do these numbers tell us? First, no one has a crystal ball to see the future. Recently purchased land (since 2001) is not generating the actual cash flow rate increase needed (in the form of higher cash rents) an annual basis to keep up with what is being paid to buy land. A farm land purchase is becoming more a risk from a cash flow perspective. Is cash flow important in today's business climate (should farm land cash flow as an investment?)? The higher the debt load to buy the land, the more important cash flow should be for the investor. Could higher cash rental rates be on the horizon? Factors to watch to help answer the above questions on cash rents in the coming years:
- US Livestock numbers – the health of the livestock industry
- Ethanol development – (Oil Prices)
- Commodities Prices
- 2007 USDA Farm Bill
To view more data or to learn more about land values, view the August 2006 issue of the Leasing Forum online at http://web.extension.uiuc.edu/leasingforum/ .
Pull date: October 31, 2006