Decrease In Gross Cash Rent To Value Ratio: What Does It Mean For SD Land Investors?

By Shannon Sand

S.D. cash rent to value rates of return remain low

The current average cash rent to value rates of return on agricultural land in South Dakota remain very low. 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. The 2016 average RTV of land value was 2.7% for all agricultural land. Categorically, the average was 3.3% for cropland, and 2.4% for rangeland. During the 1990s, the same ratios were 7.4% for all agricultural land, 8.0% for cropland, and 6.8% for rangeland. 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).

Land use categories & 2016 gross rates of return

In 2016, the statewide average gross rates of return (rent-to-value ratio) differed somewhat across land use categories: 2.4% for rangeland, 3.3% for hayland, 3.3% for non-irrigated cropland and 2.7% 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. The gross rate of return for cropland is the second lowest in the past 26 years.  This is the seventh consecutive year that gross rates of return have been 4.0% or lower. For comparison, the 2000-2009 average was 5.5% and through the 1990’s the average was 7.4%. 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).