The Farm CPA
Paul is now part of the fourth generation in America that is involved in farming and hopes the next generation will be involved also. Through his blog he provides analysis and insight to farmer tax questions.
Farmland Investing Has Been Very Competitive with Other Investments
Jun 08, 2010
One of our readers sent me an e-mail yesterday regarding an article posted by www.farmgate.com regarding the return on farmland investment from 1970 top 2009. This post was based upon the research done by Iowa State University.
Over the years farmland investment have yielded a very competitive rate of return compared to other investments. However, about half of the return comes from appreciation in land, which can be unpredictable and it does not provide any cash to cover expenses or mortgage payments.
This research broke down the years between four distinctly different periods:
- The farm boom period from 1970 to 1981,
- The farm crisis from 1982 to 1987
- The recovery period from 1988 to 2003
- The Ethanol Boom from 2004 to 2009
During the farm boom period, an average farmer enjoyed 7.3% average cash rent return on their land and their land appreciated in value from an average of $392 per acre to $1,941 per acre or an average return of about 14.3%. Therefore the total average return for this period was about 21.6%.
During the farm crisis, the average cash rent was actually at the highest average of about 8%, however, this was due to the decrease in land prices. During this period, land values decreased from $1,941 per acre to about $786 per acre or an average negative return of (14%), which about wiped out the returns during the farm boom. Overall average returns during this period was a negative (6%).
During the recovery period, average cash rents were about 7.25% and land prices increased from about $786 to $2,010 or an average increase of about 6% or a total annual return of 13.25%.
Therefore, the overall return during the 40 year period wsa about 6% from appreciation and 7% from cash rents for an overall annual return of 13%.
During the Ethanol Boom, the average cash rents was the lowest at about 4.4%, but the increase in price from $2,010 to $3,850 or 11.4% equals an average annual return of about 15.8%.
The best cash rent return was 9.6% in 1987 at the peak of the farm crisis and worst return was 2008 at 3.8% during the Ethanol Boom. The best appreciation year was 1977 at 36.8% and the worst was 1985 at a negative 28%.