According to results from a farm real estate survey conducted by agricultural economists at South Dakota State University, cash rates-of-return for all uses of agricultural land in the state declined slightly during the 1990’s and declined substantially from 2001 to the present (Graph 1). The gross rate-of-return (cash rent as a percent of land value) is used to estimate current rates-of-return to agricultural land. It is calculated from respondents’ reported average cash rental rates and their estimated average values of land. As a gross measure rather than net, this ratio estimates rates-of-return obtained by landlords, before deduction of property taxes and other landlord expenses. The South Dakota 1991 to 2017 trends of the gross rent-to-value ratios are depicted in Graph 1.
Gross rates-of-return for agricultural land have fallen over time in South Dakota because increases in cash rents have failed to keep pace with increases in land values. For example, in 2017, the statewide average gross rates of return (rent-to-value ratio) differed somewhat across land use categories: 2.24% for rangeland, 2.7% for non-irrigated cropland and 2.42% for all-agricultural land (Graph 1). The annual average gross cash rates of return for all-land, rangeland and hayland are the lowest calculated over the past 27 years. The gross rate of return for cropland is the second lowest in the past 27 years. This is the eighth consecutive year that gross rates of return for all-agricultural land has been 4.0% or lower, compared to an average of 5.5% from 2000 – 2009 and 7.4% during the 1990’s (Graph 1).
The Bottom Line
For land owners, production agriculture is an industry where land is often a majority of total asset value. While land appreciation increases an owner’s net worth, it contributes nothing to cash flow or profitability. For land owners who lease acres, cash rent is the return on their investment in land (contributing to cash flow and profitability). Cash rents that are low relative to the value of land could be problematic for land owners who have, or are considering, land purchases using credit. Relatively low cash rents relative to purchase price could signal future difficulty servicing debt. Therefore, the absence of adequate returns increases lending risk, potentially making lending less feasible and more expensive.
Graph 1. Gross Rent-to-Value Ratio 1991-2017
For more information, view the South Dakota Agricultural Land Market Trends, 1991–2017 or contact an SDSU Extension expert:
- Jack Davis, Crops Business Management Field Specialist
- Heather Gessner, Livestock Business Management Field Specialist
- Shannon Sand, Livestock Business Management Field Specialist
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