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Gross cash rent to value ratios lowest in 26 years

BROOKINGS -- The current average cash rent to value rates of return on agricultural land in South Dakota remain very low, explained Shannon Sand, SDSU Extension livestock business management field specialist.

BROOKINGS - The current average cash rent to value rates of return on agricultural land in South Dakota remain very low, explained Shannon Sand, SDSU Extension livestock business management field specialist.

"The 2016 rent to value average of land value was 2.7 percent for all agricultural land - this is 0.5 percent down from 2014," Sand said. "While 0.5 percent may not seem like much, this greatly affects the measure of how a land pays for itself for example depending on interest rates and demand for land this decrease in the gross cash to rent value could calculate out to up to an extra 5 years before the land pays for itself so instead of 30 years it's 35."

Sand said there are many factors which affect the RTV ratio including interest rates, supply and demand for land, appreciation of land, as well as the potential yields gained from the land (whether that is livestock or crops).

She explained that categorically, the average was 3.3 percent for cropland, and 2.4 percent for rangeland. During the 1990s, the same ratios were 7.4 percent for all agricultural land, 8.0 percent for cropland and 6.8 percent for rangeland.

The rent to value (RTV) ratio is calculated by taking the cash rent per acre divided by the land value per acre. This calculation is an approximation for how rapidly an asset will pay for itself.

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In 2016, the statewide average gross rates of return (rent-to-value ratio) differed somewhat across land use categories: 2.4 percent for rangeland, 3.3 percent for hayland, 3.3 percent for non-irrigated cropland and 2.7 percent for all-agricultural land (Figure 1).

"The annual average gross cash rates of return for all-land, rangeland and hayland are the lowest calculated over the past 26 years," Sand said. "The gross rate of return for cropland is the second lowest in the past 26 years."

Sand said this is the seventh consecutive year that gross rates of return have been 4.0 percent or lower.

For comparison, the 2000-2009 average was 5.5 percent and through the 1990's the average was 7.4 percent. This means that if agricultural rents were the sole source of returns from farmland it would take twice as long for the land to pay for itself in 2015 (approximately 33 years) compared to 2002 (approximately 14 years).

"The RTV gives an idea of rate of return if renting land," said Jack Davis, SDSU Extension Crops Business Management Field Specialist. "While important it is not the only thing to look at when investing in land."

Davis added that it is also important to look at the ground itself, interest rates, demand for land in the area, potential uses the land has (livestock, hunting, crops, etc.).

"All of these things will help someone calculate their potential return on an investment," Davis said.

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