Farmland Price Surge to Trigger Change in Farmland Economics?
Mar 20, 2012
The strong upswing in the value of farmland has driven returns to landowners downward from historical levels despite increases in cash rents. For Murray Wise, Murray Wise Associates, LLC, Champaign, Ill., this downshift is a major shift in farmland economics -- one that landowners are just beginning to understand.
"Farmers and farmland investors are facing a new reality of lower returns on their farmland, and we're beginning to see this both anecdotally and statistically," says Murray Wise, whose firm sells farmland by auction and private treaty. "We've been enjoying returns of 3.5 to 4.5%, but I believe that's changing dramatically. A major factor is that returns on competing investments are so low that farmland will remain an excellent investment even at rates of 3% or less, which we're already starting to see."
That doesn't mean that cash rents are falling. In fact, recent statistics prepared by Iowa State extension economist William Edwards show that cash rents in Iowa have risen steadily. "In 2006, the average cash rent on Iowa farmland was $133 per acre. Rents rose more than 11 percent in 2011, but the return based on the price of the land dropped from 3.8 percent to 3.4 percent," says Wise. And there has been plenty of anecdotal evidence that cash rents are up again in 2012, just land values are higher as well.
Does that mean farmland is losing its shine as an investment? Not according to Wise. "My local bank has been advertising 0.77% interest on a seven-month CD, and they're bragging about it. Returns on stocks, bonds and commodities have been so weak and volatile in recent years that investors have fled those assets and moved increasingly into farmland. For the immediate future, I think we'll continue to see farmland prices rise. But as far as income for investors goes, the return on investment will go down," says Wise.
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