“Investors Flock to Farmland Amid Market Volatility”[1] screams one headline.

“Bill Gates Farmland: Why is the Billionaire Buying So Much?” asks another.[2]

“How to Start Investing in Farmland” is a headline from the Motley Fool (The Motley Fool, June 30, 2025).

When I typed “is farmland a good investment” into the Google search engine, Google offered:

Farmland investments can be expected to return between 8% and 12% annually, combining lease income and land appreciation. This return profile can be competitive with other real estate and asset classes, according to AgroNosotros. The long-term average annual total return for farmland, since 1992, is around 10.2%, reports The Motley Fool. 

American farmland has produced good returns to owners for the past 30 or 40 years. But that does not mean you should expect it to produce similar returns going forward.

P/E Ratios and Farmland

Investors in stocks are familiar with the P/E or price-to-earnings ratio. It is the ratio of the price of a share of stock to the one-year earnings per share of that company. For example, if a stock earns $1 per share, and the price of the stock is $25 per share, the P/Eratio is 25.

A similar concept can be, and is, applied to farmland.

When referring to farmland, the concept is called the “cash-rent multiple.” The cash rent multiple is the ratio of the price per acre of farmland to the cash rent that the acre can be rented for in a year. For example, in 2023, the USDA reported that the price per acre on average for US farmland was $5460, while the average cash rent per acre was $155.[3]

Dividing 5460 by 155 yields a cash-rent multiple of slightly over 35.

Cash-Rent Yield

You can also easily compute a cash rent yield. This is rent divided by the price per acre. In 2023, on average, it was 155/5460, which equals 2.83%.

This yield has been trending down for 40 years[4].

Sources of Return

If you own farmland, there are only two sources of return: the cash yield, and the potential for appreciation.

Cash Yield

The cash yield can come either from renting the farm to someone who farms it, or by farming it yourself.

From an investment point of view, the return is the amount you can rent it for. If you could earn more by farming the land yourself, the difference between the amount you can rent the land for, and the amount you can earn per acre by farming the land, is a return to the labor of farming. It is not a return to the land.

About half of all the farmland in the US is rented out, so we have good market data on the levels of rents.

If today’s rent yield is 2.8%, there are two ways in which that rental yield could increase.

Rental Yields

One way is for the rents to increase, and the other is for the price per acre to fall.

How can rents increase? Leaving aside those few acres that are priced not as agricultural land, rents can increase because of inflation (which is a nominal return but not a real return), or if the value of the acre’s production increases.

The value of an acre’s production can increase if the price of the product increases more than the cost of producing it, or if the land can be made to produce more produce from the same acreage.

There has been no long run trend for the price of grains, which is the primary product of American farmland, to increase more than inflation. Here’s a graph of corn prices for the last approximately decade:

While yields per acre have consistently risen over time, the costs of inputs to produce the yields have also risen, and profits have not kept pace with yields.

Thus, history gives little reason to believe that either product prices or productivity increases will produce high future returns to farmland.

Land Price Appreciation

That leaves land price appreciation as the final way in which landowners might earn a higher return than the rental yield.

But remember that land prices are tied to cash rents by the cash-rent multiple. It seems to us that given current yields at 3% or less, there is limited ability for cash rent multiples, already in the mid 30s to rise significantly.

If you’d like a longer, more detailed version of this analysis, please ask us. You can also look in our book Investors Dilemma Decoded by replying to this email.

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[1] Farm Progress, May 14, 2025

[2] https://www.popularmechanics.com/science/environment/a42543527/why-is-bill-gates-buying-so-much-farmland/

[3] https://www.nass.usda.gov/Publications/Highlights/2023/2023LandValuesCashRents_FINAL.pdf

[4] https://farmdocdaily.illinois.edu/2016/11/cash-rent-as-a-percent-of-farmland-price.html