This summer Iowa State University economist Mike Duffy and several of his colleagues released an Iowa farmland ownership and tenure study spanning a 20-year period from 1982 to 2002.
The study points to a rapidly changing risk scenario for ag producers in Iowa. Other states are likely experiencing a similar pattern.
Most dramatic was the amount of farmland that is cash rented compared to 20 years ago. Over that period we've seen a shift from a nearly equal division of rented land between cash and crop share, to the situation in 2002 where nearly 70% of rented land is cash rented. And 37% of all Iowa farmland was cash rented in 2002.
This has many implications, the most obvious that tenants are taking more of the production risk than ever before, and farming more land than ever before. Landowners are not only taking less production risk, they're taking less financial risk than 20 years ago.
In 2002, 74% of Iowa farmland was debt free. Many of us remember the mid-1980s when much of the farmland had more debt on it than it was worth.
Lastly, land is in older hands. Owners who are 75 or older have increased acreage owned from 12% in 1982 to 24% in 2002.
We're moving to a bimodal agriculture structure where there are those who own and others who farm the land.
I've mentioned the dramatic change in net worth per acre farmed now compared to my father's generation. This leaves very little margin of error for producers. Add to that significant production cost increases due to fuel and fertilizer prices, and margins get even thinner as risk increases substantially.
Fortunately, we have more and better tools to manage that risk than ever before. For example, crop insurance offers more options and features to offset increased risks. We also have more forward pricing alternatives for grain and have futures and options to help minimize risk.
We all need to get better at using and managing these tools because risk levels are growing.
Potential Or Problems For Young Farmers?
There's a dramatic increase in land owned by nonresidents in Duffy's study. Between 1982 and 2002, nonresident ownership increased from 6% to 19%, a more than three-fold increase. Approximately 30% of Iowa's leased land is owned by nonresidents.
That explains why cash rent is more prevalent. Many owners probably never see the crop during the growing season.
These changes present opportunities for young farmers because renting is easier than buying — and more of the land will likely be rented in the future. The downside: Cash rent presents more risk than share rent.
My suggestion to young farmers is to buy a level of crop insurance that covers all out-of-pocket costs for rent and inputs. In some cases, if your machinery has a lot of debt on it, crop insurance should be used to cover your machinery payments. Your lender will feel more comfortable loaning money for cash rent if you have an adequate level of crop insurance. This makes your insurance bill high, but you'll sleep better at night.
Significant changes will continue to occur in land ownership and leasing arrangements. We can't change trends, but we can react to them. However, you must use the tools available to manage risk and take profits when opportunities present themselves.
Moe Russell is president of Russell Consulting Group, Panora, IA. Russell provides risk management advice to clients in 20 states. For more risk management tips, check his Web site (www.russellconsultinggroup.net) or call toll-free 877-333-6135.