When commodity prices rocketed upward in 2007 and 2008, one of the results was a nearly 20% increase in land values in Illinois, which was the greatest one year jump ever in the Cornbelt. On the surface that would indicate that land owners whose asset values climbed or who received higher cash rents the following year received the greatest benefit from higher commodity prices. But is that really the case?
While many studies have looked at the relationship of land prices with profits, government payments, global warming, urbanization and other dynamics, several economic researchers from Illinois say there is little consensus on the degree to which land prices capture changes in profit. Their research focuses on farm level profitability using Farm Business Farm Management Association data, instead of overall government payments, soil productivity, or other macroeconomic factors. They contend their data demonstrates different results from other studies that use county-level statistics. What they studied were commodity prices from 1996 to 2008, which included two Farm Bills and the commodity price run up from 2006 to 2008. When looking at government payments, they agree with other studies that farm operators benefit from those and allowed them to pay higher cash rents.
The relationship between higher commodity prices and cash rents in Illinois were found to be different within a given county, versus from one county to another. The economists say that means there are specific dynamics within a county that are not comparable to an adjacent county. They estimate a cash rent increase of $37 per acre with a $1 increase in the price of corn, which is about half the increase discovered by other researchers who were using wide area data, instead of data from individual farms.
Based on their research, each additional bushel of expected yield is estimated to increase cash rents by $1.80 per acre. Relative farm level soil productivity increases the cash rent by about $8 per acre for every 10% increment above the county average for soil productivity. They also found that cash rents increase by less than $10 per acre if the farm size increases by 1,000 acres.
Another finding is that when cash rent is set for more than one crop year, the changes in price levels may not be reflected annually. However, when the researchers studied farms with a new cash rent negotiation every year, the rent would include new information about market prices.
The study found that for a $1 increase in corn prices, at an average yield of nearly 170 bushels a farm operator captured $131.30 of the extra revenue, while land owners received $37.58. To the researchers, that meant large variations of cash rent within a county had a large effect on rental outcomes. Additionally, they report that when input costs were held constant, an extra dollar of government payments resulted in a 27 cent per acre increase in cash rent. However, that amount was lowered to 8 cents per acre from the 1996 Farm Bill and raised to 47 cents per acre in the 2002 Farm Bill.
Summary:
Wide variations in cash rents within a county, as reported by data from individual farms, indicates that farm operators have been able to capture the majority of the revenue from the higher commodity prices seen in 2006 through 2008. While cash rents can be averaged over a state, or a multi county region, the impact of commodity prices and other income dynamics cannot be adequately identified and analyzed until farm-level data is available.