Farms returned 7.5 percent in this year’s first half, with 5.3 percent appreciation on land and crops plus the income payout, according to the National Council of Real Estate Investment Fiduciaries’ farmland index of 547 properties. Average income from the land increased to 1.14 percent in the second quarter, as interest rates began to rise, from 1.02 percent in the prior quarter, NCREIF data show.

U.S. farmland may be 15 percent overvalued because of volatile commodity prices, with Iowa acreage potentially 40 percent to 100 percent too steep, according to a June 10 report by London-based Capital Economics Ltd.

“Both rents and land values are dangerously exposed to any further decline in corn and wheat prices,” the firm said.

Farmland values rose as the price of corn more than doubled in the two years through Aug. 10, 2012, to a record $8.49 a bushel. The most-active contract this year was down 32 percent as of Sept. 11, heading for the biggest annual decline since 1986.

Iowa, Missouri

“You can get a farmer in but he’s not going to be able to pay you the rent if suddenly his income has dropped in half,” said Paul Ashworth, the chief U.S. economist at Capital Economics. “At the very least it should make you aware of the volatility.”

U.S. Trust, which searches for properties and manages them, found Slater one in Iowa and two in Missouri. The farms, with a combined 4,300 acres (1,740 hectares), ranged in price from $1.5 million to $5 million, Slater said. They’re leased back to farmers and hunters, earning him about 5.25 percent each in 2012.

Most clients purchase farmland with cash. About 20 percent of them put leverage on a property through loans, Taylor said. Such clients are buying properties with cash to avoid delays with the seller and the leverage is put on later. That can allow them to take advantage of low interest rates to free up capital to buy additional farms or make other investments that are expected to outperform the cost of the loans, he said.

The biggest risk is weather, said Christopher Narayanan, the New York-based head of agricultural commodities research at Societe Generale SA. Last year’s drought in Great Plains states including South Dakota, Nebraska and Colorado ravaged crops, as did freezing this year in Kansas and Oklahoma.

Forestry Squad

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