Returns from farmland held by pension funds held steady through the second quarter of 2016, reports the National Council of Real Estate Investment Fiduciaries (NCREIF). The council says the total return for the quarter was 1.25%, comprised almost evenly of 0.65% appreciation and a 0.60% income return. The quarterly total return was slightly below the 1.38% returned last quarter, although above the 1.16% returned the same quarter a year ago.
Quarterly total returns have been modest in 2016, NCREIF observes, trailing the 20-year average of 3.06% by a wide margin, with agricultural income under pressure from a strong dollar and appreciation slowing on farmland valuations, which are 49% above their recessionary trough in fourth quarter 2009.
The annual total farmland return was 9.68% for the year ending second quarter 2016, down from 11.65% over the year ending second quarter 2015. The trailing year return was comprised of a 5.26% income return and 4.27% appreciation, NCREIF reports.
NCREIF notes quarterly depreciation for annual cropland led to a wider gap between permanent and annual cropland performance. Annual cropland had a 0.82% total return for the quarter with a 0.87% income return and 0.06% depreciation. Permanent cropland improved versus last quarter with a 1.78% total return, comprised of 1.52% appreciation and a 0.26% income return.
Over the past year, permanent cropland remains the stronger performer with a 14.74% total return, compared to 5.55% for annual cropland. Historically, total returns for these two categories are much closer with the since-inception- (fourth quarter 1990) return for permanent cropland being 12.49% versus 10.79% for annual cropland.
Total Quarterly Farmland Returns by Region
The Pacific Northwest was the strongest performing region in the second quarter, at 2.11%, which was close to an even split for income and appreciation. The Southeast (1.86%) and Southern Plains (1.85%) were close behind, followed by the Mountain States (1.77%) and Pacific West (1.64%). Total returns in three of these four regions -- Southeast, Southern Plains, and Mountain States -- had a strong contribution from income, while the Pacific West total return was driven by appreciation, NCREIF says.
The Lake States (0.66%) and Delta States (0.15%) eked out positive quarterly total returns due to contributions from income with appreciation flat in the Lake States and down 0.65% in the Delta States. The Corn Belt remained the weakest performing region with a negative 0.03% total return on continued depreciation. For the trailing year, the Pacific West (16.55%) continued to outperform the other regions. The Southeast (11.37%) and Mountain States (10.82%) were the only other regions to post double-digit annual total returns. The Delta States (-0.21%) and Corn Belt (-6.54%) are the only regions with negative annual total returns, NCREIF states.
The NCREIF Farmland Index consists of 696 investment]grade farm properties, totaling $7.5 billion of market value. These farm properties are comprised of 460 annual cropland properties and 236 permanent farmland properties. The index includes 213 properties in the Pacific West, 195 in the Corn Belt, 73 in the Delta States, 57 in the Pacific Northwest, 51 in the Mountain States, 38 in the Lake States, 34 in the Southeast and 21 in the Southern Plains. This data enhances the ability of institutional investors to price the risk of farmland investments across the United States.