Rents expected to follow increase in farmland value
Last winter's uncertainly on fertilizer inputs has subsided somewhat. Flexible or not, any lease is likely to reflect the strong prices for commodities and the demand for cropland.
FARGO, N.D. — While farmland values have been shooting up, land rental rates have not, but look for that to change over the winter.
“We saw a big increase in land prices from ‘21 to ‘22 and a small increase in rents,” said Bryon Parman, North Dakota State University ag finance specialist. He still sees land prices trending up, but perhaps not as steeply as in the past. “But I expect a much higher increase in the rental rate.”
Like a price swing in a commodity market, “It’s a little bit of a correction,” Parman said.
After harvest is when land rent negotiations heat up. Last year, fertilizer prices were taking off, and Parman said landlords were reluctant to jack up rates on farmers facing a lot of uncertainty.
“Now we’ve seen commodity prices stay elevated; we’ve figured out that even in this environment, that the shortages aren’t necessarily as big a concern as we thought that they were; and the yields have stayed strong this last year,” Parman said.
Eric Skollness is a farm manager with Farmers National Company and is based in Glyndon, Minnesota.
He said farmers did a good job of being proactive last year about locking in supplies. “Maybe it didn’t come as easy to them as prior years, … but they found it.”
But during that uncertainty, reaching an agreement on what was fair “wasn’t always an easy conversation,” Skolness said.
Parman said farmers have been able to just adjust to the inflated prices.
“Perhaps landlords would be more willing to raise rents this year and tenants more willing to pay them with the fears of what went on last spring kind of subsiding a little bit or people getting used to operating in that environment,” Parman said.
Skolness said the competition for farmland isn’t just for buying land. He said his firm gets calls from producers every week about any rental land that might become available perhaps through a retirement or the end of a rental agreement.
He said, for example, he spoke with a farmer who plans to bid on some property through a Farmers National auction, but in the event that farmer doesn’t win the bid, he asked Skolness to pass his name along to the winning bidder in the hope that there might be a shot at renting the land.
Parman and Skolness said most agreements continue to be a fixed cash rent deal but there is growth in flexible leases, where the landlord may get a bonus based on commodity prices or yield.
“They are a bit more complicated,” Parman said, with the parties having to agree on what price to use and on what date. They also have to be on the same page about yield calculations.
But they are an option. “In times like this where we’ve got a lot of volatility with grain prices … a farmer is willing to share with a good crop and good prices,” Skolness said. “It's not a fit for everyone, but it's it's another tool we have in our toolbox.”
For many, simpler is better.
“Landlords like to have a known amount of income they are generating in any year, and with a flex lease, that’s not the case,” Parman said.
Flexible or not, any lease is likely to reflect the strong prices for commodities and demand for cropland.
According to the National Agricultural Statistics Service, a division of the U.S. Department of Agriculture, the United States cropland value averaged $5,050 per acre in 2022, an increase of $630 per acre (14.3 %) from the previous year.
The report, which came out in August, showed nearly a 21% increase in value in Nebraska, tops in the nation, and a nearly 20% increase in value in Iowa, which has the country’s highest cropland value at just under $10,000 per acre.
In Minnesota, cropland value was up 17.6% to $6,300 an acre; North Dakota was up 14.1% to $2,350 per acre; and South Dakota was up 18.9% to $4,030 per acre.
Parman doesn’t see land prices increasing as sharply as they have over the past year. He said higher interest rates could cool off the market, but they will have to stay higher for several months to have a real effect.
“If they (interest rates) stay elevated, even with interest rates at 8 and 9%, I think the appetite (for land) might stick around anyway,” Parman said.
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With commodity prices strong and limited options for purchasing new or even used equipment, some farmers have chosen to self-finance. Others should prepare for some “sticker shock.”
“Be aware of the increase in interest rates and what that’s going to mean for your operating loan or any equipment loans or land loans,” Parman said. “There may be a little bit of sticker shock on what those expenses look like for anyone who has to borrow.”