Rising farmland prices

The farmland market has seen a perfect storm of events over the last few decades. It has seen:

1. A continuous loss of 80 million acres 

2. Extended periods of low interest rates

Which has led to rents now accounting for around 10% of the costs at the farm level. Farmers pay $30Bn in rental expenses every year and this is only likely to increase. 

A McKinsey survey of farmers in the US puts land prices as one of the top contributors to the inflation in farm expenses at the farm over this year, with expectations of rents increasing by 12.5% on an average.

Farmland prices in the Midwest

According to the USDA, land rental rates in the Midwest have undergone significant increases for over 15 years. While in Michigan farmers are paying twice of what they paid 15 years ago, on average that number is closer to 50-60%. On a relative basis the value of land/ acre has been dynamic, with the highest rental rates being paid in Indiana per the latest USDA report.

Importance of keeping up with relationships

Around 45% of all farmlands will be in transition over the next 15 years. In the context of higher real estate prices and returns in the stock market, the portfolio of farmland may well be lost forever as the next generation re-evaluates this asset class or investors with deep pockets look to redevelop/ repurpose the land. In this context keeping good relations with landowners and their successors is of paramount importance to make sure that farmland continues to remain available, but with several landowners, successors, birthdates, contracts, payment terms and contract renewal dates to remember, this activity can become not just cumbersome, but quite literally mindboggling at scale.

You are probably considering questions like:

• What happens if I switch from fixed rent to variable rent?

• How should I present the returns on the farmland versus returns on the stock exchange?

• How do I ensure that I am making the right calculations for paying out cash bonuses and rents?

These are tough questions. A good landowner relationship management system can help you with these questions and more. 

Oaken is the leading landowner management software system. Interested in how our tools could support your operation as you make decisions about land?