Farmland Rental Rates: An Economist's Outlook

3 December '13

The Western Producer just published an article with the headline:'Farmland rental rates likely to flatten'. This piece offers an interesting outlook by James Bryan, an agricultural economist with Farm Credit Canada. The article discusses two dominant determinants of land rental rates: crop receipts and interest rates, and how these factors suggest that future rates are likely to level off. We recommend taking a look at the article for yourself, but in the meantime, here are some highlights along with our commentary. 
The first determinant of farmland rental prices, crop receipts, is directly related to what's taking place in the commodity market. It seems logical that when farmers' margins are tightened, their diminished profitability translates into lowered capacity for land acquisition, both through purchase and rental. Not only is this a reality for individual farmers, but within the sector as a whole, diminished demand also predicts lower land prices. Bryan explains that when commodity prices fall, farmland rental rates face downward pressure, but that the lowered rates tend to lag behind shifts in commodity prices. He describes rates as "sticky on both ends", meaning that they are slower to rise, and slower to fall, in response to overall economic trends. The most common type of rental agreements, cash rents, are usually negotiated on a looking-forward basis for the upcoming year(s); this is another reason why rental prices do not track immediately alongside grain market fluctuations. 
According to the U.S. Department of Agriculture, strong commodity prices are anticipated over the next decade, but these are still likely to be much lower than the recent swell we've been experiencing. The expected effect of downward commodity trends (relative to the recent highs) will be a decrease in rent rates, although this may not be a drastic effect. 
Since the overall prediction in this article is that rental rates will 'flatten', not simply fall, the factor putting upward pressure, according to this article, is interest rates. 
Low interest rates, like what we are currently experiencing, tend to increase the value of farmland. This is due to lower lending rates for purchases and heightened demand and competition. However, although it may seem counter-intuitive, farmland rental rates can experience the opposite response, with lower rates leading to lower rental prices.
While interest rates are likely to remain low in the short-term, they realistically won't remain so for the long haul. Inevitably they will increase, and this should put upward pressure on land rental prices, counteracting the downward pressure anticipated from commodities. Thus, we understand that rental rates are a balancing act between the cash receipts from commodities and interest rates, leading to a forecasted flattening effect. The article quotes Bryan as saying that, "right now we have two factors working in different directions."
This article also clearly highlights the importance of land rental in Canada, with 39% of Canadian farmland currently being rented, the majority of which is done by cash rent agreements. Interestingly, Bryan made the observation that price is mistakenly assumed to be the number one consideration by landowners when it comes to selecting a tenant, yet the truth is that landowners actually value the more relational attributes above price. We could not agree more! This is in keeping with the landowner feedback we hear all the time; price is important, but it's not always the top consideration. 
While we certainly agree that both commodity prices and interest rates factor heavily into the variations we see in farmland rental rates, we believe that there are numerous additional things to consider when determining a rental price

When it comes to interpreting the trends associated with farmland rental rates, it can be confusing, even for those who strive to stay informed. One of the most advantageous features of using Rentthisland.com to find a rental match, is that no matter whether the rental prices are rising or falling, our model works in favour of both the landowner and the farm operator.

During times when the interest rates, grain prices etc. warrant higher values for forthcoming leases, this will be reflected in the offers made by the farmers. Because Rentthisland.com is a competitive offer process, landowners can be assured that they receive competitive offers relevant to the economic factors.  

Conversely, when there is a downturn in the market and for whatever reason there's justification for lower rental prices, this will be reflected in the offers made by farmers on the site. If a landowner has been accustomed to high rental prices which no longer make sense in given the current trends, our process will uncover that, sparing farmers the awkward challenge of trying to justify why a lower rate is necessary.

Ultimately, although variation is often displayed throughout the range of offers received through an offer process like Rentthisland.com, the overall result is a very effective testing of the current market value of farmland!

Be sure to leave us your questions and comments below!  
 



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