Returns to farmland ownership
By 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. | |||||