Academic journal article Chicago Fed Letter

Understanding Recent Trends in Midwest Farmland Leasing

Academic journal article Chicago Fed Letter

Understanding Recent Trends in Midwest Farmland Leasing

Article excerpt

On November 27, 2012, the Chicago Fed hosted a conference to examine recent trends in farmland leasing and their impacts on agricultural lending. Experts gathered to analyze various kinds of farmland rental arrangements, different sources of income from farmland, and shifting relationships between farmland owners and farm operators-all within the context of large and rapid rises in cash rental rates for Midwest farmland that lag the jumps in value of the land itself.

Conference presenters looked at global and domestic factors mat have contributed to large and rapid rises in rental rates for agricultural land - such as the year-over-year increase of 17% recorded in 2012 for the Seventh Federal Reserve District.1 Moreover, mere was a consensus among conference participants that higher crop prices have spurred changes in rental arrangements, including requiring renters to make additional payments, typically based on crop prices and yields. Such changes are partly due to the fact that increases in farmland rental rates continue to lag gains in farmland values. Speakers noted that even with cash rents moving up fast, agricultural producers renting farmland have strong balance sheets in general and sufficient risk-management tools to weather future volatility.

Factors affecting modern U.S. farming

In the keynote address, Murray Wise, of Murray Wise Associates LLC, characterized U.S. agriculture as a highly efficient industry that helps feed a growing world population, as evidenced by dramatic changes in food production and demand during the past two centuries. The proportion of farmers in the U.S. population fell from 80% in 1800 to under 2% in 2000. Meanwhile, global food demand has spiked up as the world's population has increased tremendously since the early nineteenth century. This dynamic has resulted today in the tightest domestic stocks of key agricultural products, such as corn and soybeans, in nearly four decades, as U.S. exports of farm products have grown exponentially.

To illustrate how a booming world populace can benefit the U.S. farming industry, Wise discussed the recent experiences of China. Per capita income growth in China over the past few years has led to large increases in household savings as well as caloric consumption. Yet, despite higher farm output, China's agricultural sector remains fragmented, with millions of small farms unable to fulfill the nation's vast demand for more calories and better nutrition. To meet the surging demand for food, China has imported extraordinary amounts of agricultural products - including, most notably, soybeans, but also corn, hay, almonds, and cotton. U.S. agricultural exports to China have expanded dramatically over the past three decades. Meanwhile, Midwest agriculture has benefited from higher demand for food and elevated crop prices as seen in soaring farmland values, with most of the land buyers being farmers. Farmland has outperformed other classes of assets in recent decades, drawing the attention of institutional investors. Nearly half (or more, depending on the time horizon) of the total returns on agricultural investments were from the income generated from the properties, with the rest from the appreciation of asset values.2 The demand to lease farmland has been intense, resulting in much higher bids at 2012 auctions for cash rentals. Wise offered these details as some of the signs that U.S. agriculture faces an exciting future. David B. Oppedahl, Federal Reserve Bank of Chicago, covered the primary reasons for leasing farmland - a widespread practice in the Midwest. Farmland owners, who often do not live on the land, receive income from leases made to practicing farmers. Rental income is mostly derived from the productivity of the land for crops and pasture, although energy production or recreational uses (such as hunting) may generate income as well. The Seventh District's farmland rental income is stronger than the U.S. average because its farmland is generally of a higher quality than that of other regions. …

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