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.

Citation

Paulson, N.D. and Schnitkey, G.D. (2013), "Farmland rental markets: trends in contract type, rates, and risk", Agricultural Finance Review, Vol. 73 No. 1, pp. 32-44. https://doi.org/10.1108/00021461311321294