Farmland more than doubled in value between 1998 and 2007, from $974 per acre to $2,160 per acre, according to the USDA Land Values and Cash Rents Summary. Not only is adding farmland to one’s portfolio potentially lucrative, but it can aid with diversification and increased cash flow can be realized by leasing the land to capable tenants.
The annual return on investment (ROI) for leasing farmland has been at about 5 to 6 percent, not including property appreciation, since 1999, according to Iowa State University’s Agricultural Extension. It is important to note that different lease arrangements may provide different returns.
Three main methods of farmland leasing are available: cash rent leasing, crop share leasing, and custom contracts.
Farmland leasing overview
Farmland has been in a bull market for more than 20 years, and the historical returns on farmland are negatively correlated with stocks but tend to track inflation, according to Forbes. Investors whose tenants grow corn are betting on continued artificial inflation from ethanol subsidies.
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“Land has been a good investment,” Gary Schnitkey, farm management extension specialist at the University of Illinois, said in an e-mail interview. “Over a [long] time period farmland returns are competitive with other assets of similar risk.”
Since ancient times, savvy landowners have offered their land to tenants in return for a share of the crops and profits. This is a crop share leasing arrangement, and divides the risk between landowner and tenant. Crop share leases require more administrative oversight than cash rent leases, including calculating necessary supplies and determining who is responsible for payment on inputs of fertilizer and crops, among other things. Crop share leases may require landowners to be more involved in the day-to-day decisions than cash rent arrangements.
Cash rent leasing is an arrangement in which the tenant pays the property owner a lump sum per year—often per acre—for use of the farmland and any other resources the landowner chooses to supply. Tenants typically provide their own equipment, labor and materials.
Some investors may choose to use flexible cash rent arrangements to avoid the self-employment taxes often required in a crop share lease while still benefiting from potential profits. Flexible cash rents can be altered by price ratios, upward and downward pricing adjustments, the cropland’s yield or a combination of these factors. Flexible cash rents transfer more of the risk onto the landowner than traditional cash rent arrangements, but allow investors to profit from unexpected windfalls.
In Iowa, 54 percent of farmland was leased in 2004, with 37 percent in cash rents and 16 percent in crop share leases, according to a 2004 Iowa State University survey of cropland leasing practices. “Statewide the percentage of land that is cash rented has increased while the percent of land in a crop share agreement has decreased,” Timothy Eggers, a field agriculture economist with Iowa State University, said in an e-mail interview.
Some investors may also consider custom contracts in which the tenant supplies all labor, equipment, planting, pest control, harvesting and storage of crops, and the owner pays for all other expenses. In these cases, the tenant usually receives a fixed payment per acre or per operation performed from the owner.
Farmland investors should have several exit strategies, since many investors eventually seek to sell their land to other farmers, to their long-term tenants or to developers.
Investors intending to eventually sell to developers should buy land within easy driving distance of a major metropolitan area. Farmland in Minnesota, Iowa and Illinois can be bought for $2,800 to $6,000 an acre and is being purchased for development at about $7,000 per acre, according to Forbes.
But, because farmland leasing can be a relatively low-maintenance investment with good cash flow potential, some investors may instead opt to hold their farmland and lease it indefinitely.