Rising farmland values are closely tied to higher net farm income. The higher the net farm income, the higher the Capitalization Rate or “Cap Rate”.
Example: Capitalization Rate = net farm income per acre / farmland value per acre
Example: $300 net farm income per acre / $8,000 farmland value per acre = 3.75% Capitalization Rate
When making projections, you can use a Cap Rate and value of farmland to estimate a cash rent level. Investors usually invest based on an expected return of 4-5%. This is one way investors look at farmland values and cash rent levels.
Cash rents can vary $100 per acre more or less than average, even among farms of similar productivity. This reminds me of the person with one hand in freezing water and one hand in boiling water who, on average, should be comfortable. This variation of cash rent is based on aggressiveness of the landowner and/or the tenant in individual negotiations.
How does a landowner evaluate cash rent?
With the increase in volatility, it has become increasingly difficult to establish a cash rent level. Following the price of corn can give a person whiplash. We have had several limit up and limit down days in recent history. Considering a $.30 per bushel change in the price of corn, with an average yield of 180 bushels per acre, creates $54 in income to that acre of farmland. This can have almost a one-toone impact on the farm’s cash rent level.
Yields have become generally more consistent with conventional and genetic improvements. However, 2010 was an anomaly with great variations in yield, breaking the recent trend of stable to increasing yields. This has added to uncertainty.
With grain prices reaching all-time highs, the cost of crop inputs have varied dramatically. The cost of fertilizer has recently followed the price of corn. With the great volatility in corn prices has come great volatility in costs.
With this uncertainty in grain prices and yields, gross farm incomes are quite variable. With great pressures on increasing production, purchased inputs have also shown great variation in cost. It is difficult for a landowner to keep upto-date on the factors affecting net farm income.
Our farm management staff closely follows trends in lease terms. We keep accurate records on production and track grain prices, as well as production input costs. With this information, we work with the landowner to design a lease that meets their goals and objectives. With a wide range in lease terms and practices, having the best information and proper evaluation of each individual situation allows for the best decision making process.
With today’s extreme volatility in factors
affecting your projected net farm income,
having a partner who has no conflict of
interest in recommending lease terms is
imperative. Please feel free to contact our
farm managers and allow us to evaluate
your farm situation.