Returns for US grain land investors lowest since at least 1980s

23.01.2017

Returns from investing in US land growing annual crops such as grains and soybeans has fallen to its lowest since at least the 1980s – opening up a two-tier farmland investment market.

Investment in arable land planted with crops such as corn and wheat, which are replanted every year, returned 4.7% last year, according to the National Council of Real Estate Investment Fiduciaries (Ncreif).

That figure - comprising income from growing crops as well as changes in land values - was the "weakest annual total return for the property type since inception" of the data series in 1990, said Ncreif, whose farm data are drawn from properties estimated at $8.0bn.

And the slowdown was underlined by a negative return, of 4.6%, on investment in land in the Corn Belt, a region including big corn and soybean producing states such as Illinois, Indiana and Iowa.

Although the council did not split out the mix between income and land values in the data on annual cropland, it acknowledged a "sharp depreciation" in Corn Belt farm prices in the October-to-December period.

Land price falls

The data tie-in with other reports on the US land market too, with a survey by Creighton University last week revealing a 38th successive monthly decline in farm values in major agricultural states such as Illinois, Kansas and Nebraska.

Central bank data two weeks ago revealed prices in Texas falling across all three major land types – irrigated, non-irrigated and ranchland – for the first time in eight years.

MetLife, one of North America's largest agricultural mortgage lenders, has forecast US land prices falling by some 20% from their peak, usually seen as having occurred early in 2015, and a floor seen being reached next year.

MetLife, like other commentators, has blamed the decline on weaker farm profitability, which has reduced the appeal of buying land, with the potential for rising US interest rates being cited by some observers as a headwind too.

'Unique divergence'

However, Ncreif highlighted that not all types were seeing such as slowdown, with investors in permanent cropland, such as orchards and groves, seeing a positive return of 10.1% last year.

That return included 7.2% from income, with the balance from gains in land values.

Indeed, a two-tier US land market has evolved, with investment in permanent cropland now for four years having notably outperformed annual cropland.

"The divergence in total farmland returns by property type has been unique to this cycle for its duration," Ncreif said.

"Historically, total returns for these two categories are much closer as shown by the since-inception [1990] return for permanent cropland of 12.5% versus 10.7% for annual cropland."

West fares best

The outperformance of permanent cropland was reflected in regional data too, with returns for areas, notably in the western US, where crops such as avocados and almonds are predominantly grown topping the league.

Annual returns in the Pacific West for 2016 came in at 10.9%, with the Pacific North West at 8.8%.

Their outperformance showed up in data for the October-to-December period too, for which "both Pacific regions were among the quarterly performance leaders, while the Lake States had a strong showing as solid income more than offset modest depreciation," the council said.

"These three regions account for 97% of the permanent cropland properties tracked in the Ncreif farmland index."


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