Farmland rental rates slow as production cost climb higher
The past couple years have fueled some very rapid increases in farmland rental rates across the state.
Landowners across the Saginaw Valley have enjoyed a rather rapid increase in farmland cash rental rates being offered over the past couple years due to major increases in the sale prices of the commodities grown in the area. Based on USDA Land Rental information the past three years have shown a 15 to 20 percent increase in land rents as a whole with individual arrangements going even higher.
This increase has been coupled with a proportional increase in land values. As with most good events, they never last forever. Crop production profits are being pressured by ever increasing input costs. The one input that seems to lead the way is “energy,” as it impacts nearly every cost related to the production, transport and processing of farm commodities. These rising energy costs provide little hope that farmers will be able to continue to bid up land rental values on a long term basis.
Cash rent bids have been more significant for landowners with highly productive soils that are well drained and have been well maintained, while other landowners have seen much smaller or slower increases in cash rental values. Lower land rents are generally tied to the lower productivity of the soils or lack of improvements being made on these farm fields. One major factor that should be considered here in the Saginaw Valley is the need for farm land to be tiled.
“We have farms that are not tiled and others with only a few strings of random tile installed decades ago that limit potential yields year after year,” says, Dennis Stein, Farm Management Educator for Michigan State University Extension. “Investing in land improvements like tile and soil fertility increases the productivity of soils in this area and can lead to higher land rental rates for landowners.”
Land that has a lower yield potential of more than 20 or 30 bushels per acre less than other fields in the area gives that field a very limited or no profit potential for the renter. On farms with detailed production data we have been able to document these field to field productions differences notes, Stein. This relates to the landlord being forced to accept farmland cash rents well below the average.
Today, the process of putting drainage tile in a field has the potential to improve soil productivity, which normally increases crop yields and the cash rental rate, providing a return on vestment that can over time pay off these improvement costs. Depending on the field conditions and crop rotation most farm producers have reported a positive return to the cost of a good tile installation in as little as 5 to 7 years in some cases. The huge demand and raw material cost increases have increased the cost of tile the past few years that will make this more expensive but with land rent increases and higher crop prices the returns should continue to be positive. Visit Dennis Stein's website for crop budgets and farm land rental agreements/ information.
Today, many landlords are working with their farm operators to develop creative methods to maintain and even improve farmland productivity and value by adding tile drainage where needed along with other management practices. One method is cost-sharing the installation of drainage tile with the renter and landlord each paying for part of the tiling cost. In many cases, a renter will agree to share some of the tile cost (labor and materials) in exchange for multi-year rental agreements that spells out a cost recapture of the tiling benefits over that period of time. This kind of cooperation can build a win-win for the landlord and the renter allowing for better returns for both long into the future.