Last year, we shared 2021 farmland cash rent values as reported by the USDA. Now that we have reviewed the 2021 data, let’s explore how much an acre of land will cost in 2022.
By looking at historical USDA data and recent commodity prices, we can identify some interesting trends that provide clues as to where 2022 farm cash rents will go and how much an acre of land will cost in 2022. We will also share some commonly used techniques and ranges that landowners and farmers use to negotiate cash rent.
There is no magic calculator for cash rent. Every farm is different, every relationship is different, but averages can produce interesting data points and observations.
To start, Tillable has found that farmland cash rents reported to the USDA are typically lower than the average being received by sophisticated landowners, professional farm managers, and investors. Our observations align with what ASFMRA has historically observed: professionally managed farmland rents 20-25% more than non-professionally managed farmland.
This observation, when combined with USDA county average rents, provides a useful data point. However, it is still a lagging indicator, meaning it does not help when forecasting how much rents will rise given the recent surge in grain prices.
How can you use this basic observation? Take the USDA county average rent for your chosen county and multiply by 1.20-1.25 to better understand a competitive rent in your area for an average quality farm. For example if the USDA county average rent in Dekalb county is $258/acre: 258*1.20-1.25 = $309-$322
Rents, Gross Revenue, and Input Costs
How much a farmer can pay in rent is related to input costs and the gross revenue generated from the rented farm. With commodity prices surging, this means the gross revenue generated on a farm will be much higher than in past years. However, with rising input costs, what will this mean in terms of an actual increase?
To understand how increases in commodity prices will impact rent negotiations, we start by looking at USDA data in Dekalb County, Illinois, and how those numbers have fluctuated over time (you can use this same methodology in any county using USDA data). We will use this data to establish trends and ratios, which will help us understand where rents might go in 2021.
Definitions and Formulas:
- Estimated gross revenue = commodity unit *price/unit
- Cash rent as a percent of gross revenue = rent/gross revenue*100
- USDA County Average rent = survey data reported by the USDA
- USDA Price Received = data collected by USDA on prices received at the state level
Methodology:
We will look at the county average yield for Dekalb county for five years and use state-level data for the price received to calculate an estimated gross revenue number. We will divide this number by the USDA County Average and rent in Dekalb to arrive at the cash rent as a percent of estimated gross revenue. We will then use this data to make some observations about 2021 rents and 2022 rents.
The Dat
| Year | 2016 | 2017 | 2018 | 2019 | 2020 | Five Year Avg. |
|---|---|---|---|---|---|---|
| USDA Co Avg. Yield | 216 | 204 | 190 | 189 | 191 | 198 |
| USDA Avg Price Received Corn | $3.55 | $3.42 | $3.50 | $3.74 | $3.47 | $3.54 |
| Est. Gross Revenue | $765.38 | $698.02 | $666.05 | $706.11 | $663.46 | $699.81 |
| USDA Co Avg. Rent | $249 | $243 | $263.50 | $284 | $262 | $260 |
| USDA Cash Rent as a % of est. gross | 32.53% | 34.81% | 39.56% | 40.22% | 39.49% | 37.32% |
| Rent @ 37% Est. Gross Revenue | $283 | $258 | $246 | $261 | $245 | $259 |
*No USDA data was available for 2018. This number is an average of 2017 and 2019.
Applying our methodology to the numbers, we find the following:
- The 5-year average for the USDA county average rent = $260/acre
- The 5-year average for the estimated gross is = ~$700/acre
- The 5-year average of cash rent as a percent of estimated gross is ~37%
We have derived a key data point from this exercise: farmland cash rent as a percentage of estimated gross revenue using USDA data for Dekalb county is 37%. We generally see cash rent as a percent of gross range between 30-38% for corn. Over those five years, we observe a low of 30% and a high of 40%, with three out of five years coming in above 38%, which indicates those years were likely lower margin years for the farmer.
Now let’s look at the data that we have for 2021.
| Year | 2021 |
|---|---|
| USDA Co Avg. Yield | ? |
| USDA Avg. Price Received (YTD) | $5.48 |
| Est. Gross Revenue | ? |
| USDA Co Avg. Rent | $258 |
| USDA Cash Rent as a % of est. gross | ? |
We are missing data for the USDA county average yield, which prevents us from calculating an estimated gross revenue. However, if we use the five-year average of the USDA corn yields for Dekalb as a stand-in, we can complete the table for 2021.
| Year | 2021 |
|---|---|
| USDA Co 5 yr. Avg. Yield | 198 |
| USDA Avg. Price Received (YTD) | $5.48 |
| Est. Gross Revenue | $1,085.04 |
| USDA Co Avg. Rent | $258 |
| USDA Cash Rent as a % of est. gross | 23.78% |
| Rent @ 37% Est. Gross Revenue | $401.46 |
If we update the original chart with the 2021 data, it looks like this:
| Year | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | Six Year Avg. |
|---|---|---|---|---|---|---|---|
| USDA Co Avg. Yield | 216 | 204 | 190 | 189 | 191 | 198 | 198 |
| USDA Avg Price Received | $3.55 | $3.42 | $3.50 | $3.74 | $3.47 | $5.48 | $3.86 |
| Est. Gross Revenue | $765.38 | $698.02 | $666.05 | $706.11 | $663.46 | $1,085.04 | $764.01 |
| USDA Co Avg. Rent | $249 | $243 | $263.50 | $284 | $262 | $258 | $260 |
| USDA Cash Rent as a % of est. gross | 32.53% | 34.81% | 39.56% | 40.22% | 39.49% | 23.78% | 35.07% |
| Rent @ 37% Est. Gross Revenue | $283 | $258 | $246 | $261 | $245 | $401.46 | $283 |
Let’s look at how 2021 changes the data and compares it to the previous years:
- The 2021 USDA cash rent as a percent of the estimated gross is only 23%, which is 9% lower than the previous five-year low. This percentage is also well below the 30-38% range we typically observe.
- 37% of the estimated gross revenue for 2021 is $401/acre, a 53% increase over the previous five-year average.
The first question many people will have is, does this mean we should expect a 53% increase in farm cash rent? The short answer is no.
Based on the data, we can be confident that an adjustment is coming – we see estimated gross surging, and we see that in 2021 the ratio of farmland cash rent as a percent of estimated gross revenue at 23% is well below the previous five year low of 32%. So, how big of an adjustment should a landowner expect? What is reasonable?
As we look at 2022, commodity prices remain strong, and many farmers have had the opportunity to forward contract grain at prices that exceed $5. Whereas in the past, many planned their expenses and rent based on prices ranging from $3.50-$3.75, most are now planning based on prices at $5 or above, so we expect estimated gross revenue in 2022 to be closer to 2021 than the previous five years. This is the good news.
However, the same inflation that has helped commodity prices has also impacted input prices, specifically fertilizer. These charts on fertilizer prices help visualize those increases:
Many also speculate that seed and equipment prices will also go up.
With that in mind, just how much does an acre of land cost in 2022?
Let’s go back to the data:
- If we look at the difference between 5-year average rent calculated at 37% of estimated gross revenue and the 6-year average, it is $259/acre vs. $283/acre, which is a difference of ~9%
- If for 2021, instead of taking 37% of the estimated gross to calculate rent, we use 30%, the cash rent as a percent of estimated gross would be $325/acre, which is an increase of ~25%. We used 30% because, as mentioned above, we generally see cash rents fall between 30-38% of gross revenue, and this would bring us back into that range.
These two numbers seem like a good place to start. On the low end, a 9% increase seems possible given the surge in gross revenue. On the high end, a 25% increase in one year feels unrealistic. Imagine the cost of any part of your business surging by 25% in a given year. Most farmers will be reluctant to increase their cash rent by 25% because they know that historically once cash rents go up, they are slow to go down, even if commodity prices go down.
This is visible by looking at the ratio of estimated gross revenue to farmland cash rents over the five years; they started at a very reasonable 32%, but as gross revenue dropped, rents did not, resulting in a peak ratio of 40%.
So what is the upper limit on a single-year increase? To answer that question, let’s go back and look at some more historical data to see if we find a precedent for a 25% YoY increase in rent. Below are USDA average rents for Dekalb County from 2010 to 2014, which is the last time we saw a similar surge in grain prices:
| Year | 2010 | 2011 | 2012 | 2013 | 2014 | Five Year Avg. |
|---|---|---|---|---|---|---|
| USDA Co Avg. Rent | $189 | $216 | $237 | $240 | $278 | $232 |
| YoY Growth | 14.29% | 9.72% | 1.27% | 15.83% | 10.28% |
- During this period, the highest YoY increase was 16%.
Let’s look a bit further. What happens if we also pull in yield and price data over this period and look at the ratio of cash rent as a percent of estimated gross?
| Year | 2010 | 2011 | 2012 | 2013 | 2014 | Five Year Avg. |
|---|---|---|---|---|---|---|
| USDA Co Avg. Yield | 180.4 | 183.8 | 159.3 | 193.8 | 194.1 | 182.28 |
| USDA Price Received Mkt. Year | $3.85 | $6.14 | $6.71 | $6.12 | $4.10 | $5.38 |
| Est. Gross Revenue | $694.54 | $1,128.53 | $1,068.90 | $1,186.06 | $795.81 | $974.77 |
| USDA Co Avg. Rent | $189 | $216 | $237 | $240 | $278 | $232 |
| YoY Growth | 14.29% | 9.72% | 1.27% | 15.83% | 10.28% | |
| USDA Cash Rent as a % of est. gross | 27.21% | 19.14% | 22.17% | 20.24% | 34.93% | 24.74% |
| Rent @ 25% Est. Gross Revenue | $173.64 | $282.13 | $267.23 | $296.51 | $198.95 | $243.69 |
| YoY Growth | 62.49% | -5.28% | 10.96% | -32.90% | 8.81% |
A couple of interesting observations:
- The ratio of USDA cash rent to estimated gross revenue is much lower throughout the entire period and lower than the 30-38% more recently observed.
- The YoY growth of rent as a percent of estimated gross increased 62% between 2010 and 2011. If you remember, between 2020 and 2021, our numbers produced 53% YoY growth. This two-year period appears to be a reasonable period for comparison.
- Cash rent continues to grow, well after declines in the estimated gross revenue. The most significant YoY increase came in 2014 as estimated gross revenue declined, an excellent example of how USDA county average rents are a lagging indicator.
After looking at this period, expecting a 25% increase in the rent this year seems unrealistic. This data also demonstrates that the last time commodities surged, cash rent as a percent of estimated gross revenue fell below the 30% threshold and reset over time as commodity prices fell and cash rents continued to increase.
In conclusion, after looking at both recent and more historical data, a more realistic expectation for farm cash rent increases this coming year is 9-14%. Furthermore, should commodities remain strong through 2022, history would suggest that rents will continue to increase until the estimated gross revenue ratio and cash rent return to the 30-38% range.
So to answer the original question, what is a competitive farm cash rent range in Dekalb County for 2022?
An increase of 9-14% is a multiplier of between 1.09-1.14. Combine that with the fact that we know that professionally managed farms rented by above-average operators rent for 20% more than their counterparts; we have another multiplier of 1.2. Put all the numbers together for Dekalb county, and we are left with the following:
| DeKalb County 2022 Rent Projections | |
|---|---|
| USDA | $281-$294/acre |
| Professionally Managed | $337-$353/acre |
Remember, good farms with good operators will rent for more than average, and some farms this year will top $400/acre in Dekalb county, but in terms of averages, we feel the above is a good range based on recent and historical data.
