Weaker Cash Rents, Land Values to Continue in 2018

Posted on 10/27/2017 12:15 PM

Landowners are expecting another round of declines in cash rental rates in 2018, according to our annual LandOwner/Pro Farmer survey. The downtrend in land values is also expected to continue next year, though a rising number of survey respondents believe land values could stabilize.

More tough negotiations on cash rental rates
land 1Many producers continue to be squeezed by tight margins, while landowners don’t want to lower rental rates any further. As a result, another round of difficult cash rent negotiations is expected this winter, according to our 2017 LandOwner/Pro Farmer land survey. While the majority of survey respondents look for a decline in cash rents for next year, the survey also shows some easing in the pressure to reduce rents.

Some 53% of survey respondents say they expect cash rents will decline in 2018, though that’s down from 74% and 73% who expected a decline in last year’s survey and in our 2015 survey, respectively.

Data from Iowa State University’s annual cash rents survey shows average cash rents have decreased for four consecutive years. With that much adjustment already factored into the market, it is reasonable to expect some decline in the percentage of respondents anticipating another decrease for 2018.

Cash rents likely to fall another 3% to 5%
By our reading, the survey suggests cash rental rates will likely slide 3% to 5% for 2018. That’s compared to the 5% to 10% annual declines noted in previous years.

This assumes there is no change in the outlook for tight margins to continue over the coming year.

Signs of financial stress still apparent... but easing?
The percentage of respondents saying they “absolutely will” walk away from their 2018 cash lease if the rate is not lowered is 9%. That’s still a sizable percentage in a market where control of acres is critical. However, that’s down from 14% in last year’s survey and 12% in 2015. In addition, the percentage of respondents saying they “probably will not” walk away from their lease if the rental rate is not lowered rose to 55% this year, up from 47% in 2016 and slightly higher than 2015’s 50%.
Those responses could be a sign of an easing in the breadth of financial stress across the range of renters.

Signs cash rental rates may be stabilizing
The percentage of survey respondents expecting cash rents to remain unchanged in 2018 nearly doubled to 45% in this year’s survey, up from 24% last year and 21% in our 2015 survey.

That increase in the percentage of those expecting “no change” in rental rates may be an early indication of stabilization in that market and that a bottom in cash rents may be nearing. However, we do not expect cash rents to bottom until 2019 or later, unless grain production margins and net farm income unexpectedly show dramatic improvement over the next year.

Steady to lower farmland values likely
land 2Nearly 48% of survey respondents say they expect farmland values to remain unchanged in 2018 compared to 2017. Another 34% look for farmland values to decline, but by less than 10%. Only 9% of respondents expect farmland values will decrease by 10% or more in 2018.

While these percentages still favor a decrease in farmland values in the year ahead, they are considerably lower than in last year’s survey, signaling improving attitudes toward the land market. Our 2016 survey found only 24% of respondents expected farmland values to remain unchanged, while 50% thought prices would decline by less than 10% and 21% looked for values to drop by 10% or more.

Relatively aggressive expansion plans
According to the survey, 36% of respondents say they plan to be in the market to buy farmland in 2018. While that’s down marginally from the 38% reported in last year’s survey, it still means roughly one-third of our Members are still willing to consider buying more farmland in 2018. Considering the income outlook going forward, that’s aggressive, a trend that has been constant over the past couple years. It also suggests these operators and owners have lower operating costs than the bulk of farming operations.

Not all are acquisition-oriented
The percentage of respondents indicating they will be in the market to sell farmland next year remains slightly elevated at 10%. This is unchanged from last year’s survey but up from 7% in 2015. This hints that the extended stretch of lower net farm incomes may still force a few land sales to rebalance financial statements.

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