Returns to farmland ownership in Iowa
Discussions frequently occur about owning Iowa farmland as an investment, and what the annual returns to land ownership have been over time. The returns can come in two forms: cash returns through rents and changes in equity through the rise and fall in market values. Total farmland return is the sum of these two.
The source of data for cash rents and farmland market values in the following analysis is the USDA National Agricultural Statistics Service (NASS) data series, data series for statewide whole farm rents and farmland market values in Iowa. Data in this series differ slightly from the Iowa State University Extension and Outreach cash rent and land value surveys.
Whole farm cash rental rates are used to estimate the cash returns to farmland for each year. The rate of cash return (percent) is computed by dividing the cash rental rate by the farmland market value in the same year.
The rates of cash return do not take into consideration land ownership costs such as property taxes, land improvements, conservation investments, liability insurance, or returns from farm production. These land ownership costs typically reduce the net returns to farmland by one to two percentage points.
Increase (decrease) in value
The other 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.
Results over the entire period
Cash returns - As shown in Table 1 and Figure 1 cash rental rates have generally trended up over the period. However, cash rental rates as a percentage of farmland market value have trended down. Rent as a percent of land value averaged 7.7% in the first half of the data series (1970-1995), but only 4.4% during the 1996-2021 period. Since 2010, rent as a percent of land value has been steady, ranging from 3.0% to 3.9%. The average cash return over the entire period from 1970 to 2021 was 6.1%.
Farmland market value change - The returns due to changes in farmland market values have been much more volatile, especially in the early portion of the years analyzed. The annual percent change in farmland market value has ranged from a high of 36.8% in 1977 to a low of negative 28.1% in 1985. In the second half of the series, the highest annual percentage change was in 2011, at 24.4%. The low was in 2015, at negative 7.8%. Over the entire period, market value of farmland increased by an average of 6.7% per year. Note that the increase in farmland market value can only be financially realized if the land is sold.
Total farmland returns - The total return (annual cash return plus change in land value) averaged 12.7% per year. The boom and bust periods of the 1970s and 1980s still hold as the peak and valley in terms of percentage changes. The highest percent increase was in 1977, at 43.1%, while the biggest decrease of -19.1% came in 1985. The average total return from 2016 to 2020 was 1.5%, as land values declined from the record highs in 2013-2015. This trend changed course in 2021 with a 12.5% total return to land, very similar to the average over the entire period.
Figure 1 shows the volatility of the average returns from owning Iowa farmland since 1970. Rates of return have varied greatly during specific time periods.
Returns adjusted for inflation
Like other prices, farmland values are affected by the rate of inflation in the United States economy. A “real” rate of return can be calculated by subtracting the change in the Consumer Price Index (CPI), a common measure of inflation, from the change in the average Iowa farmland value each year. Table 2 shows these values from 1970 to 2021, based on the USDA NASS data series. Real changes in farmland values can be caused by factors such as rising or falling crop prices, changes in the cost of production inputs, improved production potential due to new technologies, and trends in weather patterns.
Figure 2 shows that during the 1970s the rate of inflation in the United States ranged from 5-13%. This, coupled with sharply higher grain prices, caused farmland values to soar. In the early 1980s, the Federal Reserve Board curbed inflation by raising interest rates. Many farmland purchases had been made with variable rate financing, and loan servicing requirements rose rapidly. The combination of forced land sales, lower general inflation and several years of unfavorable production weather caused farmland values to decline rapidly, resulting in negative real changes in farmland values from 1981 through 1987. During the ethanol boom of 2004 through 2013, real values rose by double digit percentages in seven out of 10 years. This was followed by a retrenchment period in which real changes were negative for six consecutive years.
Over the entire period of 1970 through 2021, the nominal farmland values changed by an annual average of 6.7%. However, the average annual rate of inflation was 4.0%, leaving a real change in farmland values of 2.7%. Combining this with the 6.1% average return from cash rent gives an average annual total return to farmland ownership of 8.8%, adjusted for inflation, which compares favorably with many alternative investments.
Results by financial period
Figure 1 illustrates the volatility of the average returns from owning Iowa farmland since 1970. Rates of return have varied greatly during specific time periods. The rates of return for six specific time periods are shown in Table 3. These include the farm boom period, farm crisis period, recovery period, ethanol boom period, the stable period and the current period.
Farmland boom period - During the farmland boom period of 1970 through 1981, farmland values increased rapidly (15.3% on average), providing an average total return of 22.6%. Cash rental rates and farmland market values for the decade before 1970 were very stable but started their rapid rise in 1973 when grain shortages and increased export sales pushed prices to very high levels. High rates of inflation in the general US economy also contributed to rising agricultural prices and land values.
Farm crisis period - During the farm financial crisis years of 1982 through 1987, crop prices declined and interest rates rose significantly. The market value of farmland declined rapidly – an average of 14.0% 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 farmland market value declines more than offset cash rent returns, and the average total return was a negative 6.2%.
Recovery period - From 1988 to 2003, farmland market values and cash rental rates were less volatile and resumed their upward trend, although at a slower rate than during the boom period. The average total rate of return during this period was 13.4%, similar to the average over the entire period from 1970 to 2021.
Ethanol boom period - From the beginning of the ethanol boom period of 2004 to 2013, farmland market values and cash rental rates increased rapidly, including a “mini-boom” from 2011 to 2013. Farmland market value increased an average of 14.6% per year over this period. Because farmland values increased faster than cash rental rates, cash rental rates as a percent of farmland value dropped to an average of only 4.0%. Total returns averaged 18.7% annually.
Stable period - From 2014 to 2020, farmland market values and cash rental rates stabilized somewhat compared to previous periods. Following the ethanol boom period, farmland market value declined for six straight years, though only moderately after 2016. Cash rent as a percent of market value was the lowest it has been over the entire time frame, averaging just 3.1% during the seven-year period. However, interest rates in general in the United States were under 5% during this period, still making farmland an attractive investment. Land values declined at a yearly average rate of 1.1%, making the average total return for this time period 2.0%.
Current period - Tight supply and demand conditions for the major grains and oilseeds resulted in sharp price increases in 2021. These were quickly bid into farmland sales, causing a rise of 9.5% in the average land value. Preliminary signs point to this trend accelerating in 2022. The average cash rental rate reported in 2021 showed only a modest increase, but a continued upward adjustment is expected for 2022, fueled by tight grain supplies resulting in even higher grain and oilseed prices worldwide.
Entire period - From 1970 to the present time, farmland has yielded an average annual return of 12.7%, of which farmland market value increases accounted for 6.7% and cash rental rates 6.1%.
Results by farmland purchase date
Long-term rates of return on farmland investments can vary greatly, depending on when the farmland was purchased. In Table 4, farmland is assumed to be purchased at five different time-periods: the beginning of the boom period (1970), the beginning of the crisis period (1982), the beginning of the recovery period (1988), the beginning of the ethanol boom (2004), and the beginning of the stable period (2014). The rates of return for each of these five investment periods are shown in Table 4.
Beginning of the farm boom period (1970 to 2021) - A typical Iowa farmland purchase price in 1970 would have been $392 per acre. The value of the farmland 51 years later, in 2021, was $7,740, for an increase of 1,874% or 37% per year. The average gross cash rent return over the period was 32%. This was computed by dividing the cash rental rate for each year by the 1970 original purchase price of $392. The return ranged from 8% in the year of purchase in 1970 to a high of 64% in 2014.
Beginning of the farm crisis period (1982 to 2021) - The average farmland purchase in 1982 was $1,889 per acre. The value 39 years later in 2021 was 310% higher than the 1981 value, for an average increase of 8% per year. The average cash rent rate of return over the period was also 8%. The highest cash rental rate of return was 13%, in 2014, when cash rental rates averaged $250 per acre.
Beginning of the recovery period (1988 to 2021) - In 1988, the average farmland market value was $947 per acre. The market value in 2021, 33 years later, was $7,740, for an increase of 717% or 22% per year. The average cash rental rate of return over the period was 16%.
Beginning of ethanol boom period (2004 to 2021) - The rapid expansion of the corn ethanol industry beginning around 2004 pushed both farmland market values and cash rental rates upward. The average market value of a farmland purchase in 2004 was $2,200. The value in 2021, 17 years later increased 252% or 15% per year. The average cash rental rate of return over the period was 9%.
Stable period (2014 to 2021) - Contrary to every other period shown, the stable period shows why timing and length of investment in farmland are crucial factors. In 2014, the average acre of Iowa farmland was valued at $8,320 per acre. The value seven years later was $7,740, for a decrease of 7%, or negative 1.0% per year. Average gross cash returns over the period were much lower than in the other time frames, at 3%.
Current Period (2021) - We are only a little over one year into the current period, but it appears to be a period of higher farmland market values and cash rental rates.
Over the years, investments in farmland have yielded a very competitive rate of return. However, just over half of the returns have come from appreciation in land values, which can be highly unpredictable, and are realized only from the sale of the investment. Moreover, when investments are liquidated, gains in value may be diminished by tax obligations.
Next month’s AgDM newsletter will include an article focused on how the returns from an investment in Iowa farmland at various points in time compare to an investment in the stock market. The last version of this analysis can be found in the Ag Decision Maker newsletter archives.
William Edwards, retired economist. Questions?
Don Hofstrand, retired extension agriculture business specialist, firstname.lastname@example.org
Ann M. Johanns, extension program specialist, 515-337-2766, email@example.com