Cash Rent Lags Crop Returns In Illinois
Here's an interesting article that shows the relationship between cash rent and crop returns in Illinois over a perioed of years.
The historical relationship between average cash rents and crop revenue levels in Illinois show that, while average cash rental rates adjust to changes in crop revenues, they do so at a slower rate. In periods of increasing revenues, cash rents will also increase but at a slower rate. Similarly, in periods of declining crop revenues cash rates tend to remain stable rather than immediately adjusting to lower levels. Historically, the ratio of average cash rents to crop revenues has averaged about 40%. With the large increase in revenue levels experienced over the past 7 years, that ratio has declined to an average of 28% since 2005. This suggests that we might continue to see an increase in cash rent levels despite the large yield losses and reductions in revenue for 2012. Furthermore, even if the longer-term outlook is for lower crop prices, cash rent levels could remain stable or even continue to increase as the ratio adjusts to the higher historical level.
However, the many changes experienced in the grain industry over the past decade may cause the historical relationships to be misleading for the future. As pointed out in a recent post (here) ,more and more cash rent agreements are being negotiated on an annual basis in response to increased price variability. This trend will likely reduce the lag effect seen in average cash rent levels.
Issued by Nick Paulson
Department of Agricultural and Consumer Economics
University of Illinois"