Land values, rental rates have to come down, report says

WASHINGTON, Aug.15, 2016 – More affordable cropland isn’t just something that could improve producer margins; it’s something that is an absolute necessity, according to a new report.

That report, released Monday by Rabobank’s Sterling Liddell, says that land valuations and rental rates need to be decreased over the course of the next two years to compensate for decreased commodity prices and tighter profit margins.

“While each rental agreement is different and should be analyzed separately, generally this means a $30/acre to $50/acre decrease,” he said after describing dropping price projections. “Such a move would push returns from farming back to near break-even.”

An increase in commodity prices between 2006 and 2013 was mirrored in asking prices for acres suitable for planting. In nine of the 12 years prior to 2014, most row crop areas in the U.S. observed double-digit year-on-year growth, but steady decreases have followed in the last two years. That’s something that has to happen, Liddell asserts, if producers are going to be profitable in the face of “a 40 percent to 50 percent decline in commodity row crop prices and the inability for some costs – particularly land –  to decline at the same rate.”

“As the primary asset in the production of row crop commodities, the cost of land must reflect substantial long-term changes in profitability,” Liddell said in the report. “However, as of 2014, the cost of renting an acre of land has significantly detached from the returns generated from producing the crop.”

While maybe not as substantial as might be necessary, land values appear to be dropping. According to the Department of Agriculture, cropland prices have dropped 1 percent nationwide in the last year to an average of $4,090 per acre, but have still increased in 21 states over the same time period. Values in Pennsylvania have seen the biggest increase (up 3.4 percent to $6,100 per acre), and California has the priciest overall land at an average of almost $11,000 per acre.

Unsurprisingly, the Corn Belt remains the costliest region in the country to acquire some new land; prices in Iowa, Illinois, and Indiana all top $7,000 per acre even with year-over-year price decreases in several of the region’s states. Just to the west, four states along the central strip of the continental U.S. experienced significant drops: North Dakota land is down 6.5 percent to $2,000 per acre, South Dakota is down 5.6 percent to $3,520 per acre, Nebraska land is down 4.3 percent to an average of $4,850 per acre, and Kansas land experienced the biggest value drop in the country, down 7.2 percent to $2,050 per acre.

USDA’s figures track land value, not necessarily rental rates, but the two are usually closely related.

If rental rates do not decrease, Liddell paints a somewhat dismal picture for what could happen as producers look to adjust. Other costs of production inputs such as nutrients or crop protectants may be targeted for savings, something he says could “degrade the production value of the land for multiple years.” Producers could also be forced to walk away from land or take on acres in the form of custom farming agreements, both of which would be riskier alternatives than paying lower rent.

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And why should a landowner be willing to accept less for their asset? Liddell points to the financial reality of the situation.

“The call to action is for landowners to clearly understand the economic condition of farming and negotiate appropriate rental rates that will allow the tenant to farm effectively,” he said.

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