Cash rents are under pressure as farm incomes continue to decrease. This leads to the question, “How do I determine a fair cash rent for my farm?” The expected return from producing crops on a farm parcel is the overriding factor in determining the demand for a farm and is the primary driver in establishing an equitable rental rate.
Factors to Consider
Ultimately, supply and demand of cropland for rent will determine the cash rental rate for each parcel. Local supply and demand of cropland will affect rental rates in any given community. Listed below are some factors that influence the cash rental rate for a specific farm parcel.
- Expected Return
Rent will vary based on expected crop return. The higher the expected return the higher the rent will tend to be.
- Variability of Crop Return
Land that exhibits highly variable returns may have rents discounted for this quality. For example, land that is poorly drained may exhibit variability of returns due to late plantings from wet springs.
- Land Quality
Higher quality soils translate into higher rents.
- Fertility Levels
Higher fertility levels often result in higher cash rents.
- Drainage Capabilities
Better surface and sub-surface drainage of a farm often results in better yields and higher potential cash rent.
- Size of Parcel
Larger parcels typically command higher average cash rent per acre due to the efficiencies gained by operators.
- Ease of farming including:
- Location of Farm (Including Road Access): Good road access will generally enhance cash rent amounts.
- Shape of Fields: Square fields with fewer “point rows” will generally translate into higher cash rents as operators gain efficiencies from farming fields that are square.
Additional factors that may influence rental rates include, tillage or crop rotation, FSA Base acres, services provided by tenant, and reputation of landowner or operator.
The Big Picture
The current land rental environment is much different than it was 3 to 4 years past. There has been a large decrease in crop prices with limited adjustment in crop input costs. It is important that tenant and landlord communicate in order to continue a profitable option for both parties. If cash rents are held too high in the current commodity cycle the long term productivity of specific parcels may decrease. Ag lease 101 has valuable guides to aid in determining a fair lease.
In South Dakota rental rates vary greatly throughout the state. Soil type, moisture, accessibility, commodity prices, etc. influence land values and rental rates in South Dakota. The goal of the 2017 report is to act as a guide and help producers and land owners see what the ranges in the price and or rental rates were as of February-April 2017.
The high, average and low given for the different regions and county clusters are meant to be used as a reference or starting point. It is important to recognize that each piece of land is different, has different input requirements and logistics needed. There is also the expectation of commodity prices, input costs, etc. to consider when leasing land.
Source: Jack B. Davis, CPA, iGrow