Over the long-haul, people that buy farms can expect them to return between 10-11% on their investment– but that will probably take a couple of decades.
University of Illinois Extension Agricultural Economist Gary Schnitkey says many in agriculture have heard the old adage “farmers live poor and die rich.” He says it rings true because the return from a farm comes in two forms– and the liquid one doesn’t really cover the cost of ownership.
“So, if you look at what makes up returns you’ll find two parts of it. The current return, which for farmland is cash rent or what the farmer gets from farming it, and there is capital gain. The capital gain is the change in the farmland price over time.”
It used to be that the split between these two income sources, the return from farming the farm or the current liquid cash return, and the return from the investment in the farm or the capital gain was about equal. Schnitkey says that’s no longer the case and it makes it really hard to finance buying a farm.
“Over time the current return has been decreasing. It averaged, from the 1970 to 2021 period five percent, and now it is down to three percent.”
In practice, Schnitkey says this declining annual income portion of owning the farm, the part you get from selling the crop, isn’t enough to service the debt or the mortgage on the farm unless the down payment was bigger than 50% of the purchase price.
“So that comes back to the old adage that farmers live poor and die rich. Part of the reason that is, is because if you are buying land, you must find alternative sources to finance that farmland.”
Schnitkey says the end result is that farmland is a good asset, returning 10-11% over the long run, but the cost to get started farming is high.
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