Buy Farmland Illinois
Farmland returns have averaged around 10%, particularly when holding periods exceed 20 years. Even given this 10% average return, financing farmland is difficult because capital gains make up a large portion of total return. There is little reason to expect this situation to change in the future.
buy farmland illinois
Figure 1 shows average cash rents and farmland prices for the state of Illinois. In recent years, these values are reported by the National Agricultural Statistics Service (NASS), an agency of the U.S. Department of Agriculture. As can be seen in Figure 1, both cash rents and farmland prices rose in 2021. Cash rents increased from $220 per acre in 2020 to $227 per acre in 2021. Farmland prices rose from $7,300 in 2020 to $7,900 in 2021. Expectations are that both cash rents and land prices will continue to rise, with reports from other sources suggesting substantial increases approaching and exceeding 20% for the year from 2021 to 2022 (see farmdoc Farmland Outlook webinar).
As with all assets, there are two components of total returns to farmland: current returns and capital gains. Current returns are based on the annual cash return from farmland. Cash rent is a measure of the current return from owning farmland. On a percent basis, current return equals the cash rent divided by the farmland price. In 2021, the average cash rent of $227 divided by the average land price of $7,900 is 2.8%. Note that this is a gross return and not a net return. Land costs should be subtracted to arrive at a net return. A significant annual expense is property tax, while other land costs such as fertility or drainage tile are not likely to be incurred annually. According to Illinois Farm Business Farm Management, property taxes average $52 per acre across Illinois in 2020. Accounting for property tax causes 2021 current return to be reduced from 2.8% to 2.2%. Overall, accounting for property tax likely reduces current returns over time by .5%
Figure 2 shows current returns to farmland from 1970 to 2021. A close relationship between current returns and Treasury rates is expected, as Treasury rates represent the current return on alternative financial investments (see farmdoc Daily, March 30, 2018). Current returns and rates on 10-year Treasury notes follow each other closely, except for the late 1970s and early 1980s. Treasury rates increased during the early 1980s because of inflation. At the same time, land prices increased, causing current returns as a percent of land price to fall. During the agricultural financial crisis of the mid-1980s, the fall in land prices again caused the current return and 10-year rate to converge, and since have largely remained highly correlated. Over the entire 1970-2021 period, current returns averaged 6%. Since 2010, current returns have averaged 3% of the price of farmland.
Capital gains averaged 6% from 1970 to 2020. There are time trends in capital gains (see Figure 3), which follow changes in farmland. Land prices increased a great deal during the 1970s resulting in high capital gains. During the mid-1980s, land prices fell, resulting in capital losses. Capital gains averaged about 5% per year from 1989 to 2004. Land prices increased in most years from 2006 to 2014, resulting in large capital gains in those years. Land prices were stable and declined from 2014 to 2020, leading to low and negative capital gains.
Total return to farmland equals current return plus capital gain. Over the entire period, total return has equaled close to 11%, with current returns equaling 5% and capital gains equaling 6%. There are no general trends up or down in total returns. However, the proportion of the return coming from the current return has decreased in recent years as capital gains have increased.
Purchasing farmland with debt capital is economical as long as the return on assets exceeds debt costs. Over time, return on farmland has averaged 11%, and there is little reason to expect declines in the future. Currently, farm mortgages interest rates are between 4 and 5%. As a result, using debt capital to purchase farmland should increase the wealth positions of those buying farmland over time.
Because of low cash positions and the negative net cash position after financing, young farmers often have difficulty purchasing farmland. Returns from farmland have historically been high enough to justify using debt, but financing farmland is difficult because a large portion of the return is capital gain. That difficulty may have gotten worse in recent years as current returns as a percent of farmland price have decreased.
While total return has averaged near 11% from 1970 to 2021, timing of purchase will impact the average total return. Prices have exhibited trends over time. To illustrate, Figure 4 shows the average total return for differing holding periods. The blue line shows the average return from selling farmland in 2021 with a purchase in any previous year on the horizontal axis. For example, buying farmland in 1970 and selling in 2021 is marked by a small circle and has an 11% return. Purchasing farmland before 2004 and selling in 2021 has a return relatively close to 10%. Those returns were slightly lower for purchasing in the early 1980s as farmland had a large decline in the mid-1980s. Still, holding for 20 years or longer, no matter the purchase year, resulted in a return close to over10%. Farmland purchased in 2012 through 2016 and sold in 2021 have a holding period well below 20 years. These 2012 to 2016 purchases had returns lower than 5% because farmland prices had some declines and then were relatively stable during this period.
The green shows average return given a sale in 2014 while purchasing in the year along the horizontal axis. Compared to a sale in 2021 (the blue line), average return is higher because farmland prices were relatively stable from 2014 to 2020.
The red line represents farmland sold in 1987, when farmland prices were the lowest in the 1980s. As can be seen, buying farmland in the 1980s and selling in 1987 would have resulted in negative returns. However, purchasing farmland in the early 1970s and selling in 1987 would have resulted in an average return over 10%.
From the standpoint of generating returns, purchasing farmland in 1984 was the worst possible time to purchase farmland. As can be seen in Figure 5, a purchase in 1984 and a sale before 1988 would have generated negative returns. On the other hand, a purchase in this period would have generated an annual average return near 10% if not sold until the mid-2000s.
Farmland has had total returns that exceed the costs of debt. Still, financing farmland has been difficult because of the cash needs associated with financing and a large portion of farmland returns come from unrealized capital gains. If anything, this situation may have gotten worse in recent years because current returns as a percent of land price have declined.
Holding farmland for relatively long periods has generated returns near 10% from the1970 to 2021. Timing does matter. Overall, purchasing farmland before a land price decline results in low returns, particularly if not held for a long period. However, predicting when land price declines may occur is difficult.
The TIAA Center for Farmland Research provides several data analysis tools and decision aids, developed in the Center and in the Department of Agricultural and Consumer Economics. Farmland related tools and data are provided to assist in understanding and analyzing issues related to farmland investments.
He explained that Per Acre Cash Rents for 2022 for Excellent farmland ranges from $400 at the top end to $300 in the lower 1/3. Those same ranges for Good land vary from $360 at the top to $250 at the lower 1/3. Average farmland varies from $300 at the top to $215 at the bottom. Fair land ranges from $250 per acre to $160.
In an overlooked part of the deal, Shuanghui also acquired more than 146,000 acres of farmland across the United States, worth more than $500 million, according to U.S. Department of Agriculture data.
In addition to analyzing decades worth of USDA data, the Midwest Center also reviewed federal and state laws meant to monitor or restrict foreign influence in American farmland. The Midwest Center found:
Since 2011, Chinese businesses have made dozens of transactions for U.S. farmland, an analysis of USDA data shows. The amount of American farmland under Chinese ownership may increase in coming months, as China National Chemical Corporation awaits regulatory approval on its acquisition of seeds and pesticides firm Syngenta. Syngenta is Swiss-owned, but it oversees substantial swaths of farmland across the United States from Hawaii to Florida. Overall, Chinese companies own or are invested in more than 240,000 acres of U.S. farmland, USDA data shows.
In that report, the states that viewed foreign investment as a possible threat told the accountability office that foreign investment could drive up the price of farmland beyond the reach of local residents and allow foreign interests to control domestic food prices.
In addition, foreign entities only have to file paperwork again when farmland changes hands. There is no routine follow-up required to evaluate whether anything, such as land use, has changed, Johnson said.
Texas and Maine, which have no laws limiting foreign ownership, each have nearly 3 million acres of crop, timber and pastureland owned by foreign entities, far more than any other state. Other states with more than 1 million acres of foreign-owned farmland include Alabama, Washington, Florida, California, Colorado, Louisiana and Georgia.
So, if Bill Gates is the largest farmland owner in the U.S., who is the largest farmland owner in Illinois? Information is out there if you know how to get it and if you know what to look for. I started looking.
This was an interesting exercise for me. And while it may feel like investors are coming in and buying up a lot of land, the reality is that the holdings of these top 10 only represent 0.02% of total farmland for all the counties surveyed. That means the majority of farmland is owned by farmers and will continue to be for generations to come. 041b061a72