Largest Decrease in Cash Rents Since 1987

I was reading the latest Ag Letter from the Chicago Federal Reserve and noticed an interesting tidbit on cash rents. The first part of the letter addressed farmland values being relatively flat to slightly negative for the first quarter of 2015.

A chart on page 2 showed the annual percentage change in cash rents for the district (primarily Iowa, Illinois, Indiana, Wisconsin and Michigan) since 1981.  During 1984-1987, cash rents decreased between 6-18% each year.  From 1988 to 2013, cash rents never decreased on annual basis more than perhaps 2%.  In 2014, cash rents fell about 4% and for 2015, cash rents declined 8% in Illinois, 6% in Indiana, 10% in Iowa and 8% in Wisconsin with a small 1% increase in Michigan.

District cash rents (when adjusted for inflation) fell almost 9%, the first consecutive negative result since 2001.  Now we must realize that real cash rents had risen between 10-20% annually for 2007-2009 and 2011-2013 (2010 was a small negative).

Quoting the article “In fact, in 2015, real cash rental rates had fallen slightly below their level in 1981, whereas real farmland values were still 45% higher than their 1981 level”. 

The article also provided a line chart of real cash rents and farmland values from 1981 to 2015.  From 1981 cash rents (starting with an index of 100) were greater than farmland values until roughly 2001.  From 2001 to 2015, farmland values rapidly increased their value to where the farmland index stands at about 145-150 and cash rents stand at about 100.  This appears to be by far the largest gap since 1981.

This suggests that farmland values may have more room to drop to match up with real cash rent values (at least in the Chicago District).

Paul Neiffer, CPA