A bright outlook for U.S. farmland returns

U.S. private farmland investments generated a total return of 7.8% in 2021 as reported by the National Council of Real Estate Investment Fiduciaries (NCREIF) Farmland Index, improving 475 basis points (bps) from the previous year, reaching the highest annual level since 2015 (at 10.4%). The 7.8% reached in 2021 was higher than the five-year average of 5.7%. Annual cropland properties generated 11.1% in total return (up 686bps from 2020), while permanent crop properties posted 3.1% in total return (up 179bps from 2020). Regional farmland performance varied significantly. Return performance also varied considerably across crop type: Almonds generated negative returns, while pistachios, wine grapes, and row crop investments had healthy returns. The strength exhibited by the index is supported by the strong underlying market fundamentals in 2021, such as strong domestic and global demand amid localized production disruptions in South America resulting in high crop prices and the continued strong interests in farmland assets among the investment communities.  

The annual total NCREIF Farmland Index returns were supported by positive recoveries in both income returns and capital appreciation last year; higher income returns were a result of significantly improved row crop market conditions. The demand for agricultural commodities, especially corn and soybeans, has seen significant improvement since late 2020, as global demand for feed crops increased and domestic demand for corn in ethanol production recovered. Normalized international trade relationships between the United States and other major partners, especially China, provided additional market demand for U.S. crops. The second component of the index’s total returns, capital appreciation, also saw a sharp reversal of the compressing appreciation rates over the past three years, reflecting increasing appetite and confidence in the asset class amid an ultra-low interest-rate environment.

The health of the broader U.S. farm economy benefited from positive market conditions and the overall economic recovery in the United States and globally in 2021. The USDA estimates that 2021 U.S. crop cash receipts moved up 23.5% over 2020. The higher total cash receipts in 2021 were particularly encouraging because U.S. farmers experienced higher total revenue despite lower direct payments and ad hoc support programs, which decreased 40% from a record high of $45.7 billion in 2020 to $27.2 billion in 2021. The Phase One trade deal with China helped to provide much-needed tailwinds to demand for U.S. farm goods due to the removal or reduction of retaliatory tariffs. In terms of actual sales of farm products, cash receipts from crop sales were up 17.9% from 2020, and livestock and dairy product sales were up by 17.7% in 2021 compared with 2020.

Index overview

The most recognized measure of farmland return performance in the United States is the NCREIF Farmland Index, which is a quarterly measure of investment performance of farmland properties acquired in the private market for investment purposes. All properties in the index are held in a fiduciary environment. At year-end 2021, the index included 1,260 properties valued at $13.8 billion, up from 2020 when the index included 1,184 properties valued at $12.3 billion. The robust increase in the number and value of properties reflects growing institutional investment in the asset class and consolidation in farmland ownership. Annual cropland properties make up 76% of total properties in the index and 61% of its total value.

NCREIF provides detailed farmland returns by type of operation and region. Annual cropland properties need to be planted each year, including crops such as oilseeds, cotton, vegetables, and certain fresh fruits, while permanent cropland properties are dedicated to perennial trees, shrubs, or vines bearing crops such as almonds, apples, cranberries, and wine grapes. The largest permanent crop types in the index are wine grapes, almonds, and pistachios, combining to a total 73% of the permanent cropland value as of January 2022 NCREIF data. 

At year-end 2021, the NCREIF Farmland Index included 958 annual cropland properties valued at $8.4 billion and 302 permanent cropland properties valued at $5.4 billion. In 2021, the largest NCREIF farmland region by market value was the Pacific West (39.5% of the index), followed by the Delta States (19.2%), the Corn Belt (11.3%), and the Mountain (8.1%) regions. The Delta States, the Corn Belt, and the Mountain regions showed an upward percentage share compared with the previous year; the remaining combined regions accounted for 21.9% of the index value. 

Performance results by region and crop type

U.S. annual cropland properties generated 11.1% in total returns in 2021, up 686bps from 2020. In 2021, U.S. annual croplands’ operating income return was 3.6%, narrowly beating the income returns in 2020. The increased income returns in 2021 are a result of higher crop prices, driven by booming demand for agricultural crops both domestically and in the export markets. Besides the recovering demand for corn in domestic ethanol production, another key factor behind the increased demand for crops was the historical pace of Chinese imports of feed crops in 2021, especially corn. The drastic increase of Chinese corn imports, in conjunction with global crop production disruptions due to weather events in major production regions, increased the use of other row crops such as wheat as alternative feed sources, which collectively contributed to higher prices and healthy income returns for row crops. With positive market developments and increasing investor interest in agriculture, capital appreciation rates for annual cropland posted a strong 7.2% annual rate, which was 645bps higher than for 2020.

The NCREIF Farmland Index reported that U.S. permanent cropland generated a total return of 3.1% in 2021. While that more than doubled 2020’s 1.3%, it was the third-weakest annual performance since the inception of the index in 1991. On a positive note, the operating income returns for permanent cropland improved 142bps over the previous year, ending at 4.4% in 2021. Most (71% by value) permanent cropland properties in the index are directly operated, contributing to more volatility in operating income than for annual cropland, which is mainly leased properties. On the other hand, permanent cropland’s capital appreciation returns were –1.32% in 2021, posting the third consecutive year of negative appreciation performance since 2019. This continuing trend of overall negative permanent cropland appreciation can be attributed to the mixed price outlooks for fruits and tree nuts amid challenging supply/demand dynamics in addition to increasing concerns over water resource availability in the Pacific West region.