Who’s Paying for Increased Farmland Values?

Mar 11, 2024

Although farmland values will likely not surge in 2024, record growth over the last three years is keeping values strong. While this can be to the landowner’s benefit, some challenges arise from high farmland values, most notably increased tax liability.

Unfortunately, for landowners leasing their land for farming, current practices surrounding lease agreements don’t account for these dynamics and, more often than not, force landowners to bear 100% of these carrying costs. 

This article will walk through exactly why this is a problem, and how landowners can fix it by changing their approach to cash rental lease agreements. 

Why are farm values increasing? And how does it impact the landowner?

Although farmland values remain strong, there will unlikely be a massive surge like the ones we’ve seen from 2021-2023. 

Image source: USDA - NASS

There are a number of factors that go into these strong farmland values: 

  • Commodity prices. Although the record prices from 2021 to the present are likely a blip, and the market will even out in the coming years, prices will remain strong compared to previous years.

  • Productivity. Advancements in precision planting, applications, seed genetics, harvesting technology, and other areas have all resulted in a corresponding increase in productivity, helping farmers offset high input costs and even growing their ROI.

  • Diversification & hedging. The ground is a great hedge against other external economic factors, and the increased demand can drive additional value.

Obviously there are benefits to increased farmland values. Unfortunately, there’s also a flip side, namely in the form of increased property taxes. While these carrying costs are most often shared with tenants in other real estate sectors, the unique practices of farmland rental mean that farmers bear 100% of the carrying costs associated with asset ownership. 

This is not a fair situation. If land values are going up, the owner needs to take steps to ensure those carrying costs are more equitably shared and they can reap the benefits of owning the asset. 

Who pays for increases in farmland values? 

So what are the primary liabilities farmland owners face as farmland value increases? Here are the most common:

  • Property taxes

  • Insurance costs

  • Legal liabilities

  • Maintenance and upkeep costs

All of these carrying costs, generally speaking, are borne by the landowner. That’s because the relationships between tenants and land rental rates in the farming world is different from most real estate sectors. 

For the vast majority of rental assets, owners set rental rates based on market value. If the value of the property goes up, the rental rate rises to match. Tenants don’t really have a say in this. If they don’t pay the increased rate, they leave.

In farming, however, it’s a little different. Cash rental rates are based on the USDA published summaries. There are a number of weaknesses associated with these data, including the following. 

Self-reported data

USDA cash rental figures are based on self-reported data from farmers. This means USDA data falls prey to farmer biases. For example, farmers have an incentive to keep the county average low. As a result, they may under report the amount they pay in rentals to drive down the average and, by extension, expectations of payment in future seasons.

Limited demographic diversity

Another challenge that USDA published figures face is that they’re based entirely on a single demographic: cash rental rate. While it can provide a baseline, it provides little objective information about that particular piece of land, including factors that could justify higher rental rates: 

  • Above-average productivity

  • Production of highly profitable crops

  • High soil and land quality

  • Well maintained irrigation infrastructure

Outdated information

USDA figures are based on ten-year county averages. This means that even if your land value spiked this year, odds are your cash rents aren’t keeping up—because USDA is still factoring ten-year-old prices into their averages.

If you want to charge a fair price based on the value of your land today, not ten years ago, you need a way to quantify that value based on up-to-date metrics. 

Positive feedback loops

That farmers report cash rental payments to the USDA, which are then used as the basis for determining future rental rates, creates a positive feedback loop. 

For example, let’s say you acquire a piece of land, then find out the previous owner gave the farmer a sweetheart deal. They could be charging  the farmer $200 per acre, when the value of the land demands a rental rate of $350. This drives down the county average, which is then used to justify future low prices. 

The alternative: objective, real-time land data through CashRentstimate

Given these challenges, what’s the alternative? Simply put, it’s to base your rental rate on something objective, not subjective. 

CashRentstimate is CommonGround’s proprietary algorithm for calculating the true value of a piece of farmland, taking into account over fifty demographics, including: 

  • Crop-by-crop historic yields

  • Current grain prices

  • Weather & temperature

  • Soil quality

  • Irrigation quality

We then analyze these data using a multiple linear regression algorithm, a machine learning technique that finds the most powerful variables and weights them more heavily than others. 

This is especially helpful when comparing state-to-state, as different states have crops that are more predominant than others. For example, North Dakota produces more canola and winter wheat than Illinois. As such, canola and winter wheat weigh more heavily in the North Dakota CashRentstimate than they would in Illinois. 

Once the variables have been weighted properly, the CashRentstimate correlates each of those fifty variables with cash rental rates for the given region, combining them into a single formula that generates the most accurate estimate possible.

Instead of calculating cash rental rates based on a single metric, like ten-year county averages—the CashRentstimate takes into account all the factors that impact land value and profit potential. The estimate produced is based on facts, not guesses.

Final thoughts on increased farmland values

When farmland owners have access to real-time information on their land, they can justify higher rental rates. This enables you to get a fairer cash rental rate, which can help to offset the carrying costs of your land. 

Without this approach, you’re simply letting tenants set the price. Not only is that not fair, but it exposes you to risks you simply don’t need to bear. 

Want to learn the true value of your land and cover your increased tax liabilities? Get a CashRentstimate today.