AgDM newsletter article, July 2000

Returns to farmland ownership

William Edwards Don HofstrandBy William Edwards, extension economist, 515/294-6161, wedwards@iastate.edu, Don Hofstrand, extension farm management specialist, 515/423-0844, dhof@iastate.edu         

Below are estimates of the average returns from owning Iowa farmland since 1970.  Annual returns are in two forms: cash income and change in market value.  Total return is the sum of these two. 

Cash returns

Cash rental rates are used as estimates of the cash returns to farmland.  The rate of cash return (percent) each year is computed by dividing the cash rental rate by the market value of land.

Cash rental rates are a gross return, not a net return, because property taxes and other ownership expenses have not been deducted.  These will probably reduce the total return by one to two percentage points. 

Increase (decrease) in value

Another form of return is the annual increase (decrease) in the market value of farmland.  This increase (decrease) is computed as a percentage change in value from one year to the next.

Interpretation

As shown in Table 1, the rate of cash return has been relatively stable since 1970.  Returns dropped to 5.3 percent during the early 1980s due to the rapid inflationary rise in land value.  Conversely, the rate rose to 9.7 percent later due to the plunge in land values during the financial crisis of the late 1980s.  The average over the period from 1970 to 1996 was 7.4 percent

The return due to changes in land values was much more volatile ranging from a high of 36.8 percent in 1977 to a low of -28.1 percent in 1985.  Over the entire period land values increased by an average of six percent per year.  The total return (annual cash return plus change in land value) was 13.4 percent per year.

Table 1.  Returns to farmland ownership (per acre).
           
 
Whole Farm
Cash Rent
Market
Land Value
Cash Rent
as Percent
of Land Value
Percentage
Change in
Land Value
Total
Percentage
Return
 
Year
1999
$109
$1,770
6.2%
4.1%
10.3%
1998
109
1,700
6.4
6.3
12.7
1997
106
1,600
6.6
10.3
17.0
1996
107
1,450
7.4
7.4
14.8
1995
102
1,350
7.6
5.5
13.0
1994
100
1,280
7.8
5.6
13.4
1993
102
1,212
8.4
5.1
13.5
1992
101
1,153
8.8
1.2
10.0
1991
97
1,139
8.5
4.5
13.0
1990
96
1,090
8.8
-0.5
8.4
1989
91
1,095
8.3
15.6
23.9
1988
82
947
8.7
20.5
29.1
1987
76
786
9.7
-10.0
-0.3
1986
83
873
9.5
-20.0
-10.5
1985
98
1,091
9.0
-28.1
-19.1
1984
109
1,518
7.2
-3.2
4.0
1983
106
1,568
6.8
-13.0
-6.2
1982
106
1,802
5.9
-7.2
-1.3
1981
102
1,941
5.3
7.2
12.4
1980
96
1,811
5.3
16.8
22.1
1979
89
1,550
5.7
16.5
22.2
1978
82
1,331
6.2
5.7
11.9
1977
79
1,259
6.3
36.8
43.1
1976
69
920
7.5
28.0
35.5
1975
60
719
8.3
20.4
28.8
1974
53
597
8.9
28.1
37.0
1973
39
466
8.4
12.6
20.9
1972
35
414
8.5
5.6
14.1
1971
34
392
8.7
0.0
8.7
1970
33
392
8.4
2.6
11.0
           
Average
 
 
7.4
6.0
13.4
           
Source: USDA Annual Survey of Agricultural Land Values and Cash Rents. 
Cash rental rates for 1995 through 1999 are estimates.

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