January 25, 2011

 

US farm rents face sharp rise

 

 

Farm rents may see a possible sharper increase than 10% this year, keeping up with the strong rate of growth in US land prices, according to bank heads.

 

Land prices in America's agricultural heartland rose in January for the 12th successive month, albeit at a slightly slower pace than in December, a benchmark monthly index compiled by Creighton University showed.

 

Wyoming's land market proved the strongest, recording a reading of 78.9 in a land index which sees any figure above 50 indicating price growth.

 

The market in Illinois, the heavyweight corn and soy growing state, weakened noticeably, recording an index figure down more than 14 points while, at 67.5 points, continuing to show value growth.

 

And this year, appreciation in land prices may be firmly reflected in cash rents, which have, for a quarter of a century, lagged values. Indeed, the ratio between the two has reached levels not seen since at least the 1970s.

 

More than three quarters of bank chief executives questioned for the survey, which was launched six years ago, said they expected rises of more than 5% in farm rents this year, higher than the current pace of consumer price inflation running at a little over 1%.

 

"Approximately one-fifth expect these rents to grow by more than 10%," Creighton University economist Ernie Goss said.

 

Rent hikes of this level would be far stronger than the average rise of 5.4% in farm values reported by Purdue University, while matching the faster pace of land appreciation recorded more recently.

 

Non-irrigated land in Nebraska, for instance, where Creighton is based, has been appreciating by 9% a year, according to data from the Federal Reserve Bank, America's central bank.

 

The pace of farm prices has outpaced that of rents such that it now costs 27 times more to buy average quality land in Indiana than to rent it, compared with a multiple of 12.4 in 1986, a Purdue University report said earlier this month.

 

While farm income, as well as land prices, has boomed, cash rents may "adjust slowly" in part because contracts are often not updated annually, Purdue academics said.

 

They also highlighted that, in previous cycle, the 1970s-80s "bubble", the ratio peaked at a reading of 20.

 

However, this did not necessarily signal that the current ratio was "abnormally high", and mean that land prices were poised, as 30 years ago, for a tumble.