Educators: Ag land rent rates correlate with crop prices
MARSHALL — While farmers struggle with dropping commodity prices, they are also facing agriculture land rent rates that are not coming down as quite as quickly.
Southern Minnesota agriculture experts agree that many factors affect the rental rates of land, such as property taxes, input costs, yields, prices and gross income. However, there seems to be a relatively close tie to corn and soybean prices and southern Minnesota farm land rental rates.
Paul Lanoue, dean of agriculture and business at Minnesota West Community and Technical College, Marshall, is one of those experts.
“In recent years, there has been a major change in land ownership with a transition to the next generation who view the land and rent obtained for it more as an investment opportunity along with a belief that the renter got a good deal in 2010-2012,” he said. “The current reality is that with crop prices drastically reduced from prior levels, profitability is near non-existent for many farms.
“In 2010-2012 were some of the most profitable times for farmers,” Lanoue said. “Many of them were able to upgrade equipment or make additional purchases during this time.
“In the world of agriculture, we appreciate history and yet understand the realities of the current market,” Lanoue said. “Historically land rent has been strongly correlated with commodity prices.”
Lanoue’s reasoning is that many of the land owners had a prior connection to farming and understood the swings in commodity prices upon the dollars available for rent.
Lanoue’s comments came on the heels of a paper published by Regional Extension Educator David Bau of the University of Minnesota Extension Service based in Worthington.
Bau said that when comparing corn and soybean cash prices with average southern Minnesota farmland rental rate he could see the correlation between the two.
A chart he prepared displayed cash corn and soybean prices, the average corn and soybean price change and the southern Minnesota average rent rate for calendar years 2000-2017. It also showed actual rents multiplied by price change and previous year rent multiplied by the percentage of change in grain price in dollars and cents.
In years 2011-2013, corn prices reached as high as $6.82, while the following years it was back in the $3.85-$3.13 range.
Soybean prices were high in 2008-2014 with only 2009 dipping below $10 per bushel at $9.89 and peaking at $13.99 in 2013. Soybean prices have also been dropping since then, showing a low of $9.02 last year.
Bau’s chart shows how he determined the 2017 rental rate by multiplying the average rent in 2000 by the corn and soybean price change to determine the rental rate for 2001, and working forward through 2017.
“There are two question marks in the southern Minnesota average rent for 2017 cell because the average rent will not be available until March of this year,” Bau said.
Bau’s chart also indicates that the highest average corn and soybean price changes occurred in years 2007, 2008 and 2011, at 50.78 percent, 47.27 percent and 48.06 percent, respectively. These rates showed results of actual rents jumping from $173.14 to $184.73 before dropping to $113.16 in 2009, but increased to $170.10 in 2010 and $249.12 in 2011 before dropping again to $199.12 in 2013. It stayed below $200 until 2016 and 2017 when it was about $223 each year with negative average price changes.
There were increases during those years from each previous year’s rent multiplied by the percent in change in grain prices, with the highest change of $341.79 in 2012.
The southern Minnesota average rent, actual rents multiplied by price change and previous year rent multiplied by percent of change in grain price vary significantly, Bau said. If the change in corn and soybean prices was the main factor determining southern Minnesota farmland rental rate, you would expect the actual rental rates to be similar to those in Actual Rents Multiplied by Price Change column, he said.
Bau explained the calculations in each column to illustrate that there is a significant difference between the actual and the reactive rates. The reactive rate is closer to what was called “the coffee shop rates,” Bau said.
“Rent had been on a steady increasing trend of less than $10 per from 2000 through 2005 then started increasing more rapidly from 2006 through 2010,” Bau said. “And then increased only slightly in 2011 due to lower prices in 2009 and 2010, with $6 plus corn and $12 plus soybean prices, rents took off in 2012 and 2013 before beginning to decline in 2014 as corn and soybean prices moved lower.”
But why is the rent still high?
“Rent was slow to come up and is slow to come down. Farmers do not want to give up an opportunity to farm in the future by letting their higher priced land go,” Lanoue said.
Much of the profits realized in the 2010-2012 have been diminished as cost of production stays well below the average cash prices, Lanoue said. There are still some farmers out there who are willing to pay a high price for the land in anticipation of higher commodity prices or by utilizing the economy of scale but this number is decreasing as agricultural lenders are keeping a watchful eye on cash flow for upcoming years, he said.
“It is a good idea for all farmers to take a look at their cost of production for each of their fields and work on ways to improve their efficiency to ensure long term viability,” Lanoue said.