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The Pros and Cons of Buying and Renting Farmland

Posted by Eric Walhof on Wednesday, December 8, 2021

Is buying farmland a good investment? Let’s look at the pros and cons of buying and renting.  

image of man walking corn field

Ag Real Estate: Is Buying Farmland a Good Investment?

The current economy has created an interesting situation for farmers. For a few different reasons, which we’ll explain below, farmers have more cash on hand than they are used to.

This has them feeling like they are in a position to buy ag real estate and expand their operation. However, many other buyers are also in this position, which has created competition in the market and caused prices to skyrocket. This competition and demand for ag land has resulted in “good quality land” prices in Western Iowa increasing nearly 30% in the past 12 months. This trend is occurring in many other farm communities as well.

Higher real estate prices, along with fears that rising property taxes and interest rates in the future could send prices back down, has farmers wondering if renting land is the better option at this time.

In this blog post, we will look at why agricultural real estate prices are rising and what factors to consider when you’re deciding whether to rent or buy farmland.

Why Land Prices Are on the Rise

There are three primary reasons for the rising cost of farmland in Iowa.

1. Crops have been particularly profitable.

In the last year, Iowa has been blessed with what could go down as a record crop, even during drought conditions. In addition to high yields, cash corn prices rose as much as 38% in the last year, while soybeans rose by as much as 9.25%. This increase in profitability for farmers has put more money in their pockets.

2. Farmers received stimulus money and subsidies during the COVID-19 pandemic.

In order to boost the economy during the COVID-19 pandemic, the U.S. government provided stimulus payments to most people throughout the country. Farmers received these payments, as well as other subsidies that put cash in their pockets to help their operation. However, the pandemic created uncertainty, so many people didn’t spend the money like the government intended and are still holding onto it.

3. Interest rates are low.

Another strategy to stimulate the economy during the pandemic was to reduce interest rates. This has increased buying power for farmers. For example, if they can afford a $60,000 annual payment on land, at a 3% interest rate they can afford to buy something more expensive than if the interest rate were 5%. However, the increase in buying power has also influenced the increase in land prices.

Should I Buy, or Is Renting Farmland Profitable?

Farmers who are considering growing their operation have a tough choice to make between renting and buying farmland. Because of the high prices, it is cheaper to rent land right now, but that doesn’t automatically make it the right decision for every farmer and every operation.

Pros and Cons of Renting Farmland

Pro: Many land leases are written annually. Therefore, the rent may increase or decrease with commodity prices. Landlords are typically willing to reevaluate the lease if it is no longer mutually beneficial to both parties.

Con: There is no guarantee that a farmer will be able to rent the same land again next year. The current owner may sell it, rent it to a higher bidder or decide to operate it themselves.

Pros and Cons of Buying Farmland

Pro: They own it! This is a bit of an emotional response, but there’s a lot of pride involved in farming. When a farmer buys the land, they can use it how they want and, eventually, pass it on to their families. And, if prices continue to climb they will make a profit if they decide to sell it in the future.

Con: If interest rates rise like they are expected to, that will send land prices back down.  $15,000 per acre financed at 4% equals an interest payment of $600 per acre, which is considerably higher than a rental rate. The same decline in land prices may occur if crop prices deteriorate for a prolonged period of time. If a farmer bought the land, they may lose money when they try to resell it in the future. However, for many farmers, this may be a non-issue since they typically won’t buy land if they intend to sell it in the near future.

Tough Decisions? We Can Help!

Whatever the decision is — buying or renting — it doesn’t have to be made alone. We can look at the numbers and help you make the best financial decision for your farm operation.

Meet one of our ag bankers to learn more about how we can help. 

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The Author

Eric Walhof

Eric Walhof

Regional Bank President

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