Within the Corn Belt, 60% of the agricultural land is leased and with a high proportion of absentee land ownership. Professional farmers lease the land and accept the commodity market and climatic risk, while the landowner earns 3% to 4% rental income. Graph 7 shows the risk reward the leaseholder takes and shows the differences between the owner-operator structure and the absentee landlord. In states with relatively low climatic volatility, such as Illinois, there is a close relationship between rental income and farm level net income. However, in the states where the climate is more volatile, such as Louisiana or Michigan, there is a clear gain for the leaseholder.
Since 2009, average rental growth for cropland has been stronger (7% to 10%) in the Northern Plains and Corn Belt regions than in the Southern Plains and Delta regions where average cropland rents have increased by 3% to 6%. This is a similar pattern to that recorded for farmland values. However, rental growth has generally been slower than cropland capital growth across most regions leading to compressed rental income yields. This mirrors the trend in the UK.
The US market generally has shorter leasehold periods when compared to some other markets. The length of leases in the US are usually of three to five years in order to avoid declining rental yields and to maximise investment returns. In the UK, farm leases at market levels average between five and ten years.
One of the main challenges for new entrants into the agricultural sector, alongside understanding the investment opportunities and risks, is establishing how to invest in this relatively illiquid asset class in a way that meets the requirements of the investor. Private and institutional investors will have differing requirements. The main investment options are either through a managed fund or by direct investment. As mentioned above the latter can be by land ownership with land leased to farm operators or through operational farming on owned or leased land.