Inflation and war in Ukraine helped spur nearly 30 percent growth in Corn Belt annual cropland values over the past year, according to the National Council of Real Estate Investment Fiduciaries.
NCREIF’s first quarter 2022 farmland index showed farmland appreciation of 23.74 percent in the states of Illinois, Iowa, Indiana, Missouri and Ohio supported total gains of 27.66 percent over the year ending in Q1 2022.
Owners of professionally managed farmland properties in the neighboring Northern Plains states of Kansas, Nebraska, North Dakota and South Dakota reported 20 percent total returns over the past year, according to the index, which also showed 16.6 percent total returns for Lake States of Michigan, Wisconsin and Minnesota over the same period.
On a May webinar, University of Illinois professor and TIAA Center for Farmland Research director Bruce Sherrick said the Corn Belt reading, which is almost entirely made up of row crop properties, best reflects the correlation with inflation that has driven farmland’s recent performance. Commodity price appreciation, he said, will play a key role in determining how long the “astounding” returns reflected in the index can persist.
“With the cap-rate going up, you’d expect the value of the assets to go down, but what happens is, the income effect tends to be stronger because of the definition of inflation. The change in nominal prices of widely consumed commodities and goods is the very definition of what’s grown in this region,” he said. “The question is: how permanent is this income and what would it take to get the income expectations back down low enough that you would see any retrenchment or retracement in the appreciation?”
Overall, NCREIF’s total index of 967 annual crop and 317 permanent crop properties reported a total return of 9.73 percent over the past year, comprised of 3.82 percent income and appreciation of 5.75 percent.
Permanent crop properties recorded 3.34 percent total returns over the trailing year and annual crops saw total returns of 14.12 percent, supported largely by 10.23 percent appreciation, according to NCREIF.
NCREIF reported total returns of 2.63 percent for the first quarter of 2022, comprised of 0.67 income and appreciation of 1.96 percent.
NCREIF’s index generally mirrors developments within the $2.1 billion portfolio managed by UBS Farmland Investors, according to its asset management head, Dan Murray. Speaking on the webinar, he said disruption of supply from Ukraine has demonstrated the United States’ key role as a swing exporter to global ag markets and helps explain his firm’s exclusive focus on domestic properties.
“Notably, the commodities that tend to be exported out of the Black Sea, those are the properties where we’re seeing the biggest change in incomes in the US. If you look at commodities that Ukraine doesn’t export, almonds for example, we don’t see as much of an increase in the prices there,” he said. “That doesn’t mean that was the case just a couple of years ago, but it just speaks to why diversification matters. You don’t know where the next supply shock is coming from.”
Murray – whose LinkedIn profile shows previous experience including three years as an analyst with Louis Dreyfus Family Office-affiliate Sierentz North America – discussed broader export trends and described how increasing competition from Ukraine and Latin America since 2010 increased UBS’ focus on US farmland close to key ports.
“As long as nobody pays you to move something for yourself, reducing those transportation costs should get capitalized, to some extent, back into the value of the land,” he said.
Sherrick compared the Ukraine war’s impact to the 2012 drought in that its effects on grain stocks and usage will materialize only over multiple years. He added that interest rate, policy and production variables currently at play have created the most dynamic farmland market environment since the early years of last decade.
“June and July really matter this year for weather,” he said. “We’re at that critical level and one more major shock somewhere could really change the prices quite a bit.”