Forecasts point to smaller rental rate increases in 2024

Experts say consider flexible or variable-rate leases.

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Published on September 4, 2023

Combine harvester chart — Photo:
rkankaro, Getty Images

Here’s a silver lining for producers in this year’s sometimes smoky growing season: Those who track farmland rents expect smaller increases in 2024.

Iowa State University (ISU) ag economist Chad Hart is among the first to estimate next year’s trend. He informally surveyed farm managers and rural appraisers early in the 2023 season, bouncing findings off growers and landowners at meetings.

“As you’re going into 2024, the outlook is mixed,” he says, expecting increases of less than 5%. Some appraisers and managers even foresee a small decrease.

Recent trends offer clues to understanding rental rates and negotiating leases.

Many land-grant universities have released surveys showing rent increases in 2023 similar to those of 2022.

In Iowa, average rents rose almost 9% for 2023 over 2022, after an increase of nearly 10% in 2022.

“This year, the state average is a record high of $279 per acre,” says Ann Johanns, an ISU program specialist on farmland and building leasing.

Increases Expected

In Nebraska, cash rental rates for dryland crops rose between 7% and 11% for 2023, according to a preliminary report in March. University of Nebraska ag economist Jim Jansen expected only small changes in the final report for the year — increases of an average of 5% to 10% in eastern Nebraska.

At the other end of the Corn Belt, in Indiana, Purdue economist Todd Kuethe was expecting to see an increase in his survey.

Although rents set records in some areas in 2023 and seemed burdensome to many producers dealing with high input costs, they didn’t go up at a record rate. That came with the ethanol boom of 2006 to 2012.

Exercising Caution

For Iowa, the record jump in rents was set in 2008, when they rose by 19%, says Johanns.

Jim Knuth, senior vice president for Omaha-based Farm Credit Services of America, thinks the decline in farm income after the ethanol boom is why rents haven’t risen quite as fast during the past two years of strong farm income.

“At the end of the day, we have not seen a dramatic acceleration in cash rents like we did during the boom,” he says. “Producers remember how fast margins and profitability can change.

“What we saw was an appropriate amount of caution from producers when negotiating cash rents,” Knuth says.

This caution came despite good farm income.

“Last year in the central and eastern Corn Belt, most farmers had their best year ever,” says Doug Hensley, president of Hertz Real Estate Services, a Nevada, Iowa, farm management and real estate business that manages more than 600,000 acres across the Midwest.

Few expect similar results for 2023, with lower commodity prices and USDA’s early projection of a 16% drop in net farm income.

In an analysis of land rent trends posted on the Ag Decision Maker website, ISU economist Alejandro Plastina also predicts downward pressure on 2024 rents.

Aerial view of tractor on the background of stock charts. — Anton Petrus, Getty Images

Variable-Rate Leases on the Rise

Looking ahead, Plastina suggests using university surveys as “a reference point for negotiating an appropriate rental rate for next year,” with the caveat that numerous factors can be used to argue for lower or higher rates. They include: small field size, terraces or creeks that slow planting and harvesting, high or low fertility, and above-average local prices from proximity to biofuel plants or feed mills.

Another caveat: University and government surveys don’t really reflect rents in an open market.

A lot of cash rents are between family members and are more favorable to farmers, says Knuth. These get mixed into the averages.

Farm managers agree.

“You’ll see some farms in Iowa that will go for $400 to $500 [an acre], and you get over into Illinois and you’ll find some $500 and $600 rents,” says Hensley. “I’m not saying that’s the market everywhere, but you can find them pretty easily.”

Steve Bruere, president of Peoples Co. in Clive, Iowa, concurs that $600 rents are out there, and “there are a lot of $400 to $425 rents.”

Bruere, Hensley, and Knuth encourage the use of flexible or variable-rate leases between landowners and farmers. These leases usually start with a rate the producer finds reasonable for covering costs and adds on a bonus to the landlord that shares profits in good years. That bonus may be calculated using yields and average prices or net income, for example.

“There’s a hundred different variations,” Hensley says of flex leases.

Knuth estimates that a fourth or more of farm rents are now under flexible arrangements. Some university surveys suggest a smaller amount, but there is consensus that use of these leases has grown dramatically in a decade.

A 2022 University of Illinois study com-pared one form of variable rent with cash rents. It showed variable rents doing better for corn and soybean farmers than cash rents during low-income years and not as well in high-income years.

To make any kind of rental agreement work, communication is key, says ISU’s Hart. Farmers may feel that if they share too much financial information, landlords will squeeze more income from them. Landlords who aren’t given details on a renter’s farming practices may fear that a tenant is draining soil quality. Yet, most landowners want their tenants to succeed. Sharing more information can build confidence, accord-ing to Hart.

“We find that the more communication there is, the better that rent negotiation goes,” Hart says. “Both parties feel better about it.”