View from the Cab: Examining Rent

January 9, 2017

 

As we see changes in farm income levels, it can be tricky to come up with the appropriate cash rent.

 

I had the chance to listen to Dave Lattz of the University of Illinois speak during last month’s Illinois Farm Economics Summit in Champaign. He noted that there are still quite a few crop share leases out there.

 

“They adjust to the economic times year to year,” Lattz said.

 

In 2015, 42 percent of farmers had crop share leases; 51 percent were cash rent (31 fixed and 20 variable); and seven percent had custom farming arrangements or other agreements.

 

There are some tips Lattz provided to determine the appropriate cash rental rate.

  1. The cash rent market approach – observe what land is doing in your area. NASS provides an average cash rent document each year for the entire state.

  2. Consider the net return to the operator and land.

  3. Use a landowner’s adjusted net-share rent.

  4. Consider the percent of gross returns on the farm.

Even though there has not been a dramatic drop, Lattz has observed some rents coming down. Illinois grain farms are showing an increased credit risk, much like what happened in 1998. Lattz said this is a time to be cautious with brief instances of really bad credit and low inflation.

 

“I also encourage you not to be too cautious,” Lattz added.

 

Borrowers are likely to face increased scrutiny as we move forward. Not the best news for the ag industry but it is something we are starting to get used to, unfortunately. Who knows, maybe 2017 will be the year when things turnaround.

 

 

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