For a decade, low mortgage rates and rising house prices have made buying a home an exceptional investment. From July 2021 to July 2022, housing prices in Iowa increased by 10.4%. But the houses have nothing to do with soaring cropland prices.
From 2021 to 2022, based on survey data collected by the USDA’s National Agricultural Statistics Service, cropland in Iowa jumped 19.7% to $7,810 per acre in 2021 to $9,350 per acre in 2022 (Figure 1). The average of $9,350 per acre is a record for Iowa. The 19.7% rise for 2022 is the largest annual increase in the value of Iowa’s cropland in the USDA survey since 2011 and 2012.
Iowa’s pasture value in 2022 averaged $3,300 per acre, up 9.3% from 2021. The value of $3,300 per acre was slightly lower than the record 2014 value of $3,330 per acre. Over time, pasture values tend to follow cattle and corn prices.
Cash rents are rising
In August, NASS released the results of its annual cash rent survey. The results provide state and county estimates of cash rent paid for irrigated cropland, rainfed cropland, and pasture. NASS excludes land leased for a share of the crop, on a royalty per head, per pound of gain, per animal unit month, leased free or land that includes buildings such as barns from the results of the l ‘investigation.
Cash rent for rainfed cropland averaged $256 per acre in Iowa in 2022, $23.00 per acre or 9.9% higher than in 2021 (Figure 3). That average cash rent was still below the 2014 record of $260 per acre. Grundy County, Iowa had the highest cash rent in 2022 for rainfed cropland at $304 per acre. Ida, Black Hawk and Bremer complete the top five counties. In the Driftless area, District 3 farmland had an overall average of $278 per acre. Davis County, at $154 per acre, had the lowest average cash rent for rainfed cropland.
Recognize that soil quality, field size, topography, drainage, existing relationships between parties, demand for nutrient management purposes, and other factors can result in widely varying cash rental rates , even within a county.
In 2022, cash rent for pastures in Iowa averaged $59.50 per acre. It was $1.50 per acre or 2.6% above 2021 and a record high. Sioux County had the highest published pasture cash rent at $83 per acre, followed by Page and Shelby counties at $81 per acre. Louisa County had the lowest pasture cash rent at $28 per acre.
Pasture cash rental rates generally vary depending on the quantity and quality of forage, species and composition of forage, existence and condition of fencing, quality and availability. water, management practices required by the landowner, among many other factors.
A higher interest rate is a brake
The Federal Reserve has asserted that it will use its monetary policy tools forcefully, including higher interest rates, to tackle inflation. However, reducing inflation has a cost. Agriculture is a capital-intensive industry. Many farmers make extensive use of borrowed funds. All other things being equal, higher interest rates increase expenses and reduce farm profits.
Interest rates can also have a profound impact on the value of land and the ability of cash leased land to generate income to pay rent. The Federal Reserve Bank of Chicago publishes average agricultural mortgage interest rates for the Seventh District consisting of Iowa, most of Illinois, Indiana, Michigan and Wisconsin. The rate for the second quarter of 2022 was 5.17%, compared to 4.44% in the first quarter of 2022 (Figure 4). A year ago, rates were 4.02%.
Land Revenue Trends
One way to value land as an investment is simply to divide the net operating income of the property by its current market value. Net operating income is the expected annual income minus the expenses incurred in owning the land.
A shortcut is to use cash rent as a proxy for net operating income. Think of rent as the dollar income a non-farm landowner would expect to receive from renting the land to a tenant. To get a net return, subtract property taxes, insurance, maintenance or management fees and any other relevant ownership costs from the cash rental rate. Most people simply use the cash rental rate as an indicator of net return.
Dividing the Iowa cropland cash rent of $256 per acre for 2022 by the average cropland value of $9,350 per acre yields a return on investment of 2.7%. Iowa cropland yield rates have varied
between 2.7% and 6.5% since 1997. Dividing Iowa’s pasture cash rent of $59.50 per acre for 2022 by the average pasture value of $3,300 per acre yields a return on investment of 1.8%. Iowa pasture yield rates have hovered between 1.5% and 5.1% for the past 26 years.
Cash rent gains have tracked recent gains in farmland values. Therefore, both ratios have generally tended to decline over time. Grazing ratio bottomed in 2014. Cropland ratio bottomed in 2022. Ratios vary based on location, market values and other factors.