US farmland returns continue to slide

US permanent cropland continues to outperform row crops, are also falling much more gradually.

Returns from US permanent cropland continued to outperform annual cropland in the second quarter of this year, with overall farmland returns falling, according to the National Council of Real Estate investment Fiduciaries.

According to the NCREIF Farmland Index, US farmland generated returns of 1.25 percent, down from 1.38 percent during in the same quarter last year. Returns since then total 9.68 percent, compared with 11.65 percent the previous year. At the same time, the gap between returns for permanent and annual crops has been widening.

Annual cropland faced a 0.06 percent depreciation in value, with income returns falling to 0.87 percent this quarter. Income returns since the second quarter of last year were 3.7 percent, with 1.8 percent capital appreciation, amounting to 5.5 percent for the year.

Permanent cropland, on the other hand, delivered capital appreciation returns of 1.52 percent and income returns of 0.26 percent, amounting to total returns of 1.78 percent this quarter. Since the middle of last year, permanent cropland has delivered 14.7 percent total returns, divided almost evenly between capital appreciation and income returns of 7.2 percent and 7.1 percent respectively.

The current rift between permanent and annual cropland returns is far greater than its average over the last 25 years. Annual cropland returns have averaged 10.79 percent compared with 12.49 percent for permanent cropland, since NCREIF began publishing its index in 1991.

A global glut in commodity row crops and the strong US dollar has meant growing international competition and thinner margins for US commodity row crop producers in recent years.

Permanent crops, which deliver higher margins but entail greater risks associated with growing longer-lived, often thirsty trees, have enjoyed strong total annual returns since incomes from annual and permanent cropland peaked in 2012 and 2013. However, annualised income returns for permanent crops have dropped steadily since 2013 and were only slightly higher in the year ending in the second quarter of 2015 than during a 2009 low marking the start of two years of depreciation for permanent cropland.

Source: NCREIF.

Source: NCREIF.