Farmland rental markets: trends in contract type, rates, and risk

Abstract

Purpose -This article aims to explore recent trends in farmland rental markets using data for the state of Illinois. Trends in the types of rental agreements used and the relationship between the rental rate for those contracts, land values, crop revenues, production costs, and farm returns are examined. Design/methodology/approach -Data from various sources and at different levels of aggregation for the state of Illinois are used to provide illustrations of historical trends in farmland rental agreements and rental rates, and how they are related to various market and industry factors. Focus is placed on the more recent period since 2005 characterized by high commodity price levels and volatility. Findings -The majority of farmland in the Midwest is controlled under rental agreements which are increasingly of the fixed cash rent type. Rental rates have increased, but at a slower rate than farm returns. Average rental and interest rates imply that land values are consistent with the current market environment. Aggregate rental rates mask considerable variation in farm-level rents, only a portion of which can be explained by differences in soil productivity. Given the current level of price volatility, the tenure position of a farm operation has a significant effect on downside risk exposure. Originality/value -The illustrations provided in this paper should be of interest to researchers working in the area of farmland values and rental agreements, as well as to practitioners including farmers, landowners, and professional farm managers. The findings should motivate additional research and recognition of the importance of tenure position to the performance and risk exposure of grain farms.

Property Tax Incidence on Cropland Cash Rent

“…Across the Midwest, the majority of farmland is controlled under rental agreements, which have been increasingly of the fixed cash rent-type, although no such data exist to assess if Ohio has similar trends. 13 Paulson and Schnitkey (2013) note that since 2005, fixed-cash rents became the preferable option of operated farmland in Illinois, with around 40% of all operated land (as opposed to share rent agreement or owner-operated land). In their study, cash rental agreements represented about 25% of operated land in 1997 and have had a steady increase in operated acreage across the state.…”

German Farmers’ Perspectives on Price Drivers in Agricultural Land Rental Markets—A Combination of a Systematic Literature Review and Survey Results

“…The decision to rent land is usually made on the basis of short-to medium-term considerations, without speculation on an increase in the value of the land [13]. Opposed to expansion via additional land ownership renting additional farmland has also been shown to provide a lower risk opportunity for growth, resulting in a greater ability to repay farm debt [14,15]. Additionally, the higher the transaction costs on the land sale market, the more important land rental markets are for farmers in comparison [16].…”

Why the Uncertain Term Occurs in the Farmland Lease Market: Evidence from Rural China

“…Some studies discussed the impact of risk on farmland leasing. For example, Paulson and Schnitkey [14] examined the relationship between contract type, rental rates, crop revenues and risk and found that the tenure position of a farm operation has a significant effect on risk exposure due to the price volatility. Yang et al [23] analyzed the effect of landowners' risk and time preferences and land quality on the equilibrium terms of contracts (land-leasing contract, fixed-price contract and revenue-sharing contract) with the purpose of net benefit maximization.…”

“…Yang et al [23] analyzed the effect of landowners' risk and time preferences and land quality on the equilibrium terms of contracts (land-leasing contract, fixed-price contract and revenue-sharing contract) with the purpose of net benefit maximization. However, recent studies mainly considered the contract types' determination [14,16,17], and few of them especially paid close attention to the decision of the term of a farmland lease contract.…”

“…With the development of the farmland lease market, there is an increasing body of research work highlighting the risk of farmland leasing [14][15][16]. For example, farmland leasing may lead to further land abandonment, which may threaten food security [15] and the possibility of the moral hazard caused by the tenant [16,17].…”