AgDM newsletter article, October 2003
by William Edwards, extension economist, 515-294-6161, email@example.com, Don Hofstrand, extension farm management specialist, 515-423-0844, firstname.lastname@example.org
Below are estimates of the average returns from owning Iow 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 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.
Results over the entire period
Cash returns - 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 2002 was 7.5 percent.
Land value change - 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 negative 28.1 percent in 1985. Over the entire period, land values increased by an average of 5.9 percent per year.
Total returns - The total return (annual cash return plus change in land value) was 13.4 percent per year. It ranged from a low of a negative 19.1 percent in 1985 to a high of 43.1 percent in 1977.
Results by financial period
Rates of return have varied greatly during specific time periods over the past thirty-three years. The rates of return during the farm boom period, farm crisis period and the current period are shown in Table 2.
Farm boom period - During the farmland boom period of 1970 through 1981, land values increased rapidly (15 percent on average) providing a total return of 22.3 percent. It should be noted that cash rental rates and land values for the decade before 1970 were very stable. Farmland values and rental rates started their rapid rise in 1973/74 when grain shortages pushed prices to extremely high levels.
Farm crisis period - During the farm crisis of 1982 through 1987, land value declined rapidly - an average of 13.6 percent per year. As noted previously, cash returns actually increased during this period because land value dropped faster than rental rates. However, the land value declines more than offset cash returns and the total return was a negative 5.6 percent.
Current period - During the period after the farm crisis and up to the current time (1988 - 2002), land values and rental rates resumed their upward trend, although slower than during the boom period. The average rate of return during this period is similar to the average rate of return over the entire period.
Results by alternative land purchase dates
Rates of return on farmland investments vary greatly depending on when farmland is purchased. In Table 3, farmland is assumed to be purchased at three different time-periods; the beginning of the boom period (1970), the end of the boom period (1981) and the end of the crisis period (1987). The rates of return for each of these three investment period are shown in Table 3.
Beginning of boom period (1970) - A typical Iowa farmland purchase in 1970 would have been $392 per acre. The value of the farmland 32 years later in 2002 was $1,980, for an increase of 405 percent or 13 percent per year. The average cash return over the period was 22 percent. This was computed by dividing the cash rental rate for each year by the $392 purchase price. The cash return was 30 percent in 2002 when cash rent was $116 per acre.
End of boom period (1981) - A farmland purchase in 1981 would have been for $1,941 per acre. The value 21 years later in 2002 was two percent higher. The average cash return over the period was five percent. The cash return was six percent in 2002 when cash rents were $116 per acre.
End of the crisis
period (1987) - In 1987 farmland value was $786 per acre. The
value in 2002, 15 years later, was $1,980 for an increase of 152 percent or
10 percent per year. The average cash return over the period was 13 percent.
The cash return in 2002 was 15 percent.
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