Recent surveys show a continuing climb in farmland values. Dan Pillar at the Des Moines Register reported “the value of Iowa farmland jumped 24.5 percent since March 2010 — the biggest annual increase in more than three decades.” The article noted that while increases in commodity prices are fueling the rise in farmland value there are other factors. These include low interest rates and a lack of farmland for sale.
There are concerns of a bubble, but Pillar reported, “The current era has yet to generate disproportionately more borrowing. Iowa banks have reported generally flat demand for agricultural loans as cash-rich farmers write checks for land and equipment rather than taking out loans.”
The article ended, however, with a warning from Thomas Hoenig, the President of the Federal Reserve Bank of Kansas City, that “a land price boom like this will generate more borrowing, it always does,” and “State banking regulators have to be alert and farm operators themselves need to be cautious. Bad loans are always made in good times.”
It is also important to recognize the significance of land value increases on farm leases. Most landlords are aware that rising land values often mean a higher cash rent as the land is the principal contribution made by the landowner in a farm lease arrangement. However, as the article points out increases in land values do not necessarily mean a corresponding increase in commodity prices or at least farm operator income.
In the context of a sustainable farm lease it remains important for farmland owners and farm operators to discuss changing circumstances and negotiate lease arrangements that provide fair compensation for the value of the land while maintaining the ability to provide proper stewardship.
Another option is to use a flexible cash lease arrangement that automatically adjusts rental rates each year based on predetermined factors, such as commodity prices, yields (either on-farm or county averages), and even land values. Such agreements can assist in developing a fair rent, sharing the risk of farming, and allowing for long-term lease arrangements. This may also help reduce adversarial negotiations each year that can result from changing rates.