Farm profits were strong in 2013, keeping the demand for land leases steady, according to a new report from Farmers National Company, the nation's largest farm and ranch real estate company. In early 2014, despite lower commodity prices and decreased gross incomes, farm profitability remains good due in part to a 30% drop in fertilizer prices since 2012 and carryover grain sales from the previous crop year.
"Demand for high quality property is keeping both land values and rental rates strong," says David Englund, executive vice president of farm and ranch management for Farmers National. "Overall, lease rates are higher on quality land if the land was rented below market in 2013, but rates across the board are mostly level. Fertilizer costs are expected to drop further in 2014, which will help farmers remain profitable."
The desire of farm owners to expand existing operations is leading to highly aggressive sales activity and keeping demand for farmland strong. In addition, there has been a trend of young people coming back to family farm operations prompting additional demand for land. "As a result of these factors, lease rates for land should remain steady and strong throughout this year," says Englund.
Flexible cash rent leases are becoming more popular this year
Farm profitability is prompting a widespread movement from traditional cash rent arrangements to Cash Rent-Plus (flex rent) leases. This rental arrangement provides landowners with a negotiated base cash rent supplemented by a potential additional payment, based on operation profitability. "Many local farm operators and landowners are finding this option provides the best scenario for achieving the desired results for each party," says Englund.
While leasing activity is fairly consistent nationwide, there are a few regional trends, he says. Crop yields in northern Iowa and southern Minnesota were negatively impacted by delayed planting caused by wet ground last spring. However, risk management tools, including crop insurance, have allowed farms in this area to curb their financial losses and hold lease terms steady.
Demand for high quality land to lease in Iowa is staying strong in 2014
Ranch properties in the Sandhills of Nebraska and in Texas have had strong demand for pasture boosting rental rates. Rental rates in the Mid-South are fairly stable with some areas seeing slightly lower levels with drops of nearly 10%. Many multiyear leases that are being renegotiated are seeing rates jump 50% to 60% as a result of appreciation in recent years and previously undervalued rates. New clients with existing leases often are below the market as much as $100 an acre, says Englund.
"Overall, lease rates were stable throughout 2013 following a record farm income year. Cash Rent-Plus leases should continue to be popular in the current market," he says.