Returns to farmland ownership in Iowa
Much discussion occurs around the purchase of farmland as an investment. To analyze returns to farmland, the annual returns can be considered in two forms: cash returns through rents and change in market value. Total return is the sum of these two. The analysis that follows does not take into consideration any land ownership costs or returns from farm production. The source of data for cash rents and land values is the USDA National Agricultural Statistics Service (NASS) data series for whole farm rents and value, not data from ISU Extension and Outreach, which refers to rental rates for corn or soybean land only.
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 in the same year.
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.
Also, cash returns have not been adjusted for inflation over this period.
Increase (decrease) in value
Another form of return is the annual increase or decrease in the market value of farmland. This increase or decrease is computed as a percentage change in value from one year to the next.
Both the estimated cash rental rate and the land value are based on USDA surveys. They differ slightly from Iowa State University surveys.
Results over the entire period
Cash returns - As shown in Table 1 and Figure 1, the rate of gross cash return has been up and down since 1970. The return was only 2.8 percent in 2017, with land values not declining in value at the same rate rental rates have in recent years. Current land values are 5.9 percent down from the peak seen in 2014, and rental values have declined slightly more at 9.1 percent. Conversely, the rate of cash rent as a percent of the land value was 9.6 percent in 1987 because land values declined faster than rental rates during the crisis of the 1980s. The average over the period from 1970 to 2017 was 6.3 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 7.3 percent per year.
Total returns - The total return (annual cash return plus change in land value) averaged 13.6 percent per year and ranged from a low of a negative 19.1 percent in 1985 to a high of 43.1 percent in 1977. Figure 1 shows the volatility of the average returns from owning Iowa farmland since 1970.
Results by financial period
Rates of return have varied greatly during specific time periods over the past forty-seven years. The rates of return for five specific time periods is shown in Table 2, this includes: the farm boom period, farm crisis period, recovery period, ethanol boom, 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 (15.3 percent on average) providing a total return of 22.6 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 financial crisis years of 1982 through 1987, land values declined rapidly – an average of 14 percent per year. Cash returns as a percent of land values actually increased during this period because land values dropped faster than rental rates. However, the land value declines more than offset cash returns and the average total return was a negative 6.2 percent.
Recovery period - From 1988 to 2003 land values and rental rates resumed their upward trend, although at a slower rate than during the boom period. The average rate of return during this period has been similar to the average rate of return over the entire period.
Ethanol boom period - From the beginning of the ethanol boom period of 2004 to 2010, farmland values and rental rates increased rapidly. Farmland values increased an average of 11.9 per year over this period. Because land values increased faster than rental rates, cash rent as a percent of land value dropped to an average of 4.3 percent. Total return averaged 16.3 percent.
Current period - From 2011 to 2017, land values and rental rates have stabilized somewhat compared to previous periods. The current period includes a “mini boom” in 2011-2013, and mild declines since then, at least as far as land values and rents. Cash rent as a percent of value is the lowest it has been over the entire time frame, averaging 3.1 percent in the past seven years. Land values have maintained an upward trend, with an increase of 9.6 percent, but did see an average decline of 1.9 percent in the three most recent years when record yields have also been realized. Total return for this time period was 12.7 percent.
Entire period - From 1970 to the present time, farmland has returned an average of 13.6 percent, of which land value increases accounted for 7.3 percent of the increase, and rent as a percent of land value accounted for the remaining 6.3 percent.
Results by farmland purchase date
Rates of return on farmland investments vary greatly depending on when farmland is purchased. In Table 3, farmland is assumed to be purchased at five different time-periods; the beginning of the boom period (1970), the end of the boom period (1981), the end of the crisis period (1987), the beginning of the ethanol boom (2004), and the beginning of the current period (2011). The rates of return for each of these five investment periods 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 47 years later in 2017 was $8,000, for an increase of 1,941 percent or 41 percent per year. The average gross cash return over the period was 30 percent. This was computed by dividing the cash rental rate for each year by the 1970 original purchase price of $392. The return ranged from eight percent in the year of purchase in 1970 to a high of 64 percent in 2014.
End of boom period (1981) - The average farmland purchase in 1981 would have been for $1,999 per acre. The value 36 years later in 2017 was four times the 1981 value, for an average increase of eight percent per year. The average gross cash return over the period was seven percent. The gross cash return was 12.5 percent in 2014 when cash rents were $250 per acre.
End of the crisis period (1987) - In 1987, the average Iowa farmland value was $786 per acre. The value in 2017, 30 years later, was $8,000 for an increase of 918 percent or 31 percent per year. The average gross cash return over the period was 18 percent. The gross cash return in 2017 was 29 percent.
Beginning of ethanol boom period (2004) - The rapid expansion of the corn ethanol industry beginning around 2004 pushed both land values and rental rates upward. The average value of a farmland purchase in 2004 would have been $2,200. The value in 2017, thirteen years later was $8,000 for an increase of 264 percent or 20 percent per year. The average gross cash return over the period was eight percent.
Current period (2011) - In 2011, the average acre of Iowa farmland was valued at $5,410 per acre. The value six years later, is an increase of 84 percent, or 14 percent per year. Average gross cash returns over the period were lower than other time frames at four percent.
Over the years, farmland investments have yielded a very competitive rate of return. However, more than half of the return comes from appreciation in land value, which can be highly unpredictable. Moreover, it does not provide any cash for making mortgage payments or paying other ownership costs.
Note: This article is an update of a previous version, which appeared in the May 2010 Ag Decision Maker Newsletter.
William Edwards, retired economist. Questions?
Don Hofstrand, retired extension value added agriculture specialist, email@example.com
Ann M. Johanns, extension program specialist, 515-337-2766, firstname.lastname@example.org