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Midwest cash rents up, but growth rate slowing

Indiana Correspondent

WASHINGTON, D.C. — Cash rents nationally and in this region are up over last year, but the rate of growth has slowed, according to the most recent numbers from the USDA’s National Agricultural Statistics Service (NASS).

From 2012 to 2013, cash rents for non-irrigated cropland in Illinois, Indiana, Iowa, Kentucky, Michigan, Ohio and Tennessee increased 1-14 percent. From 2011 to 2012, those states were up 11-24 percent. The only exception is Ohio, which saw a 14 percent increase over last year and an 11 percent jump from 2011 to 2012.
Nationwide, the average cash rent for non-irrigated cropland was $125, up from $115 in 2012 and $101 in 2011. NASS released its report on cash rents Aug. 2.

“We’d heard that the rents would continue to grow, but it would be tempered a bit,” said Jay Johnson, regional director of the Great Lakes Region of NASS. “Prices are still driven by what seem to be fairly strong commodity prices.”

The numbers aren’t a surprise, as the industry is dealing with uncertainty over the next farm bill and what might happen with agriculture and energy policy, said Todd H. Kuethe, an economist with the USDA’s Economic Research Service.

“We’re expecting to see a continued upward trend (in cash rents), but muted,” he said. “They’re saying ‘let’s hedge our bets just a little bit. We don’t want to be too aggressive now.’”

Last year’s drought may have had a role in the smaller increase in cash rents this year, said Craig Dobbins, an agricultural economist at Purdue University.

“Last year, we had the same concerns that commodity prices might go down, but that got put off a year,” he said. “This notion that commodity prices could go down was around last year but it sounds more convincingly like it could happen this year.”

The relationship between commodity prices, input costs and cash rents isn’t as strong as some might think, Dobbins said. “Once (cash rents) have gone up, it’s really difficult for them to come back down,” he explained. “But there certainly is some relationship between cash rents and commodity prices, because there has to be a margin so the farmer can make some money.”

Cash rents are set in various ways, he said. For example, a landowner with high-quality land may look for competing offers to get a higher price, he said. A landowner with a history with a particular tenant may look at additional things the tenant does around the farm, such as keeping it neat and waterways in good shape, and helping with fence repair, he noted. Those factors may lead a landowner to work with the farmer to come up with a rent reasonable to both.

With tighter margins expected, landowners and tenants might find negotiations on cash rents a little different this fall as they plan for next year, said R.D. Schrader, president of Schrader Real Estate & Auction Co., Inc., based in Columbia City, Ind.

“It does depend in part on the crop (this year) and what prices do in the next few months,” he said. “But a good deal is one that benefits both landowners and farmers. They should both look across the fence and see themselves in their shoes.”

Cash rents are closely tied to the natural productivity of the farmland, which is why neighboring states may see differences in rents, Dobbins noted. “The state average corn yield in Ohio is less than Indiana, Indiana’s is less than Illinois and Illinois is less than Iowa,” he said.

The average cash rent for Illinois is $223, up 5 percent from last year’s $212, according to NASS. Indiana, at $190, is up 10 percent from $173; Iowa, $255, up 9 percent from $235; Kentucky, $148, up 14 percent from $130; Michigan, $110, up 10 percent from $100; Ohio, $139, up 14 percent from $122; and Tennessee, $89, up 1 percent from $88.

Given the uneasiness over where commodity prices are headed and where they might settle, Dobbins also expects tenants to be more cautious this fall as they plan for next year. He anticipates cash rents will continue to go up – but at a slower rate.

Cash rents aren’t tied to commodity prices as strongly as they were 25 years ago, Kuethe said. If prices would come down for a long period, though, that could be reflected in cash rents.

“There are some very sophisticated landlords who follow commodity prices and they get good information from the USDA and extension,” he added. “They also work with farm managers and try to find good tenants. They talk to each other and they know what others are getting. They really pay attention to what other farmers are paying.”