The total return from farmland owned by pension funds rose during the fourth quarter, according to the National Council of Real Estate Investment Fiduciaries (NCREIF). The index maintained by NCREIF notes the total return for the fourth quarter of 2017 was 2.93%, up from 1.02% last quarter and 2.89% in the fourth quarter 2016. The quarterly total return was comprised of a 2.13% income return and appreciation of 0.80%.
Rolling Fourth-Quarter Total Returns
Income returns for the Total Farmland Index consistently strengthened throughout the year, closing out 2017 at 2.13% in Q4. Farmland values have been shifting between appreciation and depreciation each quarter since mid-2016 and, after modest depreciation of 0.31% in Q3, registered appreciation of 0.80% in Q4.
The trailing 4-quarter total farmland return was 6.19% through fourth quarter 2017, compared to 7.09% for the year ending fourth quarter 2016. The annual total return was comprised of a 4.61% income return and 1.54% appreciation.
The gap between permanent and annual cropland widened in the fourth quarter with quarterly total returns of 5.23% for permanent cropland and 1.21% for annual cropland. Permanent cropland outperformed in both income and appreciation, with an income return of 3.71% and appreciation of 1.53%. Annual cropland performance for the quarter was again dominated by its income return with appreciation rising modestly to 0.26%. Over the trailing year, permanent cropland returned 8.14%, compared to 4.75% for annual cropland. Since inception, total returns for these two categories have less of a gap with annualized returns of 12.36% for permanent cropland and 10.44% for annual cropland.
All but one region had positive total returns in the fourth quarter. The Pacific West (5.04%), Pacific Northwest (2.90%), and Southern Plains (2.29%) led regional performance for the quarter. Despite recording the strongest appreciation return among the eight NCREIF farmland regions during Q4, the Pacific Northwest was the only region to post negative income (-0.65%). The Southeast (1.66%) and Delta States (1.55%) had modest appreciation to support total returns, while depreciation in the Mountain (0.46%) and Corn Belt (0.33%) was a drag on mildly positive total returns. The Lake States was the only region to post a negative total return (-2.38%), driven by depreciation of 3.87%. The only negative regional quarterly total return was in the Lake States, at -1.54%, which had a modest income return and 1.86% depreciation. This was the sixth straight quarter, and the fifteenth quarter out of the last sixteen, that the Lake States Region has posted depreciating values, resulting in a decline in value of 13.6% for the region since Q4 2013.
The NCREIF Farmland Index consists of 727 investment-grade farm properties, totaling $8.5 billion of market value. These farm properties are comprised of 486 annual cropland properties and 241 permanent farmland properties. The index includes 227 properties in the Pacific West, 176 in the Corn Belt, 81 in the Delta States, 67 in the Mountain States, 57 in the Pacific Northwest, 45 in the Southeast, 36 in the Lake States and 20 in the Southern Plains. This data enhances the ability of institutional investors to price the risk of farmland investments across the United States.