The really BIG change in farmland nobody’s talking about — yet

Farmland prices in Iowa rose by an average of 23.7 percent in the last 12 months, and that’s what passes for a slowdown these days. (The numbers came from the semiannual survey by the Iowa Farm & Land Chapter of the Realtors Land Institute.)

We’ve heard — and talked about — these huge numbers throughout the Midwest to the point where they barely even register any more. But I think there’s an even bigger shift afoot: A decline in the returns to be gained by investing and leasing farmland.

It’s being obscured right now, because the total return (including price appreciation) is off the charts by historical standards. But in terms of income (such as that based on cash rents), returns are falling and are already below 3 percent in some cases.

Rents have been rising and were up more than 11 percent in Iowa last year, according to Iowa State extension economist William Edwards. It’s just that they’re not rising as fast as prices per acre, so the rate of return is lower. And realistically, where else are investors going to go? My local bank is promoting a seven-month CD at a whopping rate of 0.77 percent. Money market rates in many cases are significantly below 0.5 percent!

Currently, buyers for farmland outnumber sellers by about 20 to one. As long as that imbalance remains in place, expect land prices to continue to ratchet up faster than cash rents, resulting in lower returns on the current value. But it’s worth noting that on an absolute basis, farmland investors are making more than ever.