December 6, 2001
LANDLORD RETURNS FROM ILLINOIS FARMLAND
Farmland returns are conceptually similar to stock returns. For a stock there
may be a cash return, or dividend, and there may be appreciation in the stock's
value. Similarly, farmland has a cash return to the landowner in the form of a
net return from leasing the land. Farmland also may increase in value. However,
like a stock investment, farmland values also can decline. This paper examines
historic cash returns, or net returns, to landlords leasing Illinois farmland
using typical crop share leases.
Different Soil Productivity Levels
Data from the Illinois Farm Business Farm Management (FBFM) Association is
used to estimate the landlord's net return for three different soil productivity
ranges (SPRs). SPRs include higher quality soils for northern and central Illinois
(SPR of 86 - 100), lower quality soils for northern and central Illinois (SPR
of 56 - 85), and southern Illinois soils (SPR of 36 - 85).
For 1991 through 1994, actual landlord records are used to calculate net returns
per acre. Since 1995, farm operator returns and costs are used to estimate landlord
net returns. These estimates are based on typical crop share leases. Landlord
net returns are defined as the landlord's share of gross revenue (grain sales
and government payments) less all expenses that are paid by the landlord (crop
expenses, insurance, and real estate taxes) under a typical crop share lease.
These net returns are not comparable to cash rents. Insurance and teal estate
taxes must be subtracted from cash rents to be compared to net returns. Returns
to landlords will vary depending on variations in lease terms.
Landlord's Net Returns
Figure 1 shows landlord's net returns per acre for 1991 through 2000 for the
three different soil productivity levels. As expected, the most productive farmland
has the highest net returns while lower productivity farmland has lower returns.
Farmland with the highest net return per acre does not necessarily have the highest
return on investment. Year-to-year changes in the value of the land along with
the value itself must be considered when calculating return on investment. In
some years, lower productivity farmland may have the highest rate of return on
investment because of the lower per acre investment values.
Figure 1. Landlord's net reutns from Illinois farmland, 1991 -- 2000.
Since 1991, the highest landlord net return per acre for the most productive
soil occurred in 1993 with a return of $122 per acre. The second highest was in
1996 with a net return of $119 per acre. The lowest net return, $81 per acre,
occurred in 1991. The second lowest net return of $84 per acre occurred in 1998.
The highest net return for the northern and central Illinois farmland with a SPR
of 56 - 85 occurred in 1996 and 1997 with a return of $105 per acre. The lowest
net return was in 1991 with a return of only $59 per acre. The highest net return
for southern Illinois, $89 per acre, occurred in 1993. The lowest net return of
$56 per acre was in 1998. Net returns for all three groups have been increasing
Trends in Net Returns
Landlord's net returns to farmland (with crop share leases) vary from year-to-year
depending on a number of factors, including crop yields and prices. Looking at
returns over time by calculating a moving average provides an indication of the
trend in returns. Figure 2 illustrates landlord's net returns based on a four-year
moving average for the three different soil productivity ranges. Based on the
four-year moving average, net returns peaked in the 1995 through 1997 time frame
and have been declining since. However, the rate of decline is slowing down and
if net returns in 2001 are similar to 2000 net returns, the trend in net returns
should level off.
Figure 2. Landlord's net returns, four year moving average, 1991 -- 2000.
Net returns have been increasing the last two years but are at lower levers
than the early to mid 1990s. Net returns based on a four-year moving average peaked
in the mid 1990s and have been trending downward since. However, the downward
trend is beginning to level off. Future returns, in part, will depend on the new
government farm program scheduled to begin in 2003.
Issued by:Dale Lattz, Department of
Agricultural and Consumer Economics