Average US farmland returns fall, perm cropland holds its ground

US farmland returns fell year-on-year during the first quarter of 2015 for the second consecutive year, according to the National Council of Real Estate Investment Fiduciaries (NCREIF) All Farmland Properties Report.

Farmland across the US posted a 2.08 percent total return, taking into account 1.26 percent in farmland value appreciation and 0.82 percent income return. This was a fall from the 2.41 percent recorded for Q1 2014 and a more than 60 percent fall on 2013 values (5.44 percent).

Row crop land, including corn, wheat and soybeans, was the worst performer – yielding less than 1 percent during the quarter.

“That to me is certainly not surprising,” Paul Pittman, chief executive of real estate investment trust Farmland Partners, told Agri Investor. “The annual crop farmers have been hurt by lower commodity prices and they are the biggest purchasers and drivers of farmland value.”

Corn prices have dropped drastically from levels two years ago and it’s hard for farmers to make a living, said David Gladstone, chairman of another listed farmland REIT. Farmers are asking landlords to reduce their rent, contributing to lower farmland incomes and, consequently, a lower farmland value, he added.

Permanent cropland returned much higher results as crops such as cocoa, coffee and rubber reached total returns of 3.64 percent during the period. This is the highest first quarter result recorded since 2006.

Regionally the Pacific West, which produces a lot of permanent crops, performed best during the quarter despite the ongoing drought in California, returning a total average of 3.77 percent. The vast majority of that return was from capital appreciation which accounted for 3.11 percent while income returns averaged at 0.66 percent.

“The land is so scarce in California for fruits and vegetables that it just never goes down,” said Gladstone. “When a farm goes out of production it’s because it’s been bought for houses or governments or parks.”

The impact of the drought is a longer-term issue that has not yet come to a head in agriculture yet, argued an investment consultant, who did not want to be named. Even fruits and vegetables, which are not permanent crops, haven’t seen a negative impact from the drought, she said, adding that much of the region is irrigated.

“Both income and appreciation returns for the Farmland Index in the first quarter were both positive but slightly lower than the first quarter returns from a year ago,” Bill Frisbie, chairman of the NCREIF farmland committee and managing director at Gladstone Land, said in a press release. “However, the one-year total return is still strong at 12.24 percent. There continues to be strong interest in many markets for high quality farmland from both institutional investors as well as local farmers on property that comes up for sale.” Frisbie said all of Gladstone Land’s properties are in the index.

The worst performing region during the quarter was the Pacific Northwest which includes the US states of Oregon, Washington and the Canadian province of British Columbia. Total returns were minus 0.65 percent during the period.

Row cropland and permanent cropland used to return at similar figures until about 10 years ago when permanent cropland started to surpass it, according to NCREIF’s report. Real estate development potential might be embedded in the value of permanent cropland, argued a source familiar with the industry. That’s why permanent cropland values were historically in line with annual cropland until 2004 when the values separated. And it happened again in late 2012 because “the value of corn and soyabean crops was falling but permanent crops held their value,” the source said.