Rather than simply comparing a 5% Treasury yield with a 3% farmland cap rate, let's put actual numbers behind both investments.

The Minnesota Farm

Consider a 160-acre Minnesota farm with the following numbers:

Land value: $10,000 per acre 

Total value: $1,600,000 

Cash rent: $300 per acre 

Annual gross rent: $48,000 

Land-management expense: $5,000 

Net income before taxes: $43,000

Before taxes, the farm is producing a 2.69% net cash return on its $1.6 million value.

That is an important distinction from the 3% gross capitalization rate. Ownership expenses reduce the actual cash return received by the landowner.

Now Put $1.6 Million Into Treasuries

For comparison, assume a 10-year U.S. Treasury yield of approximately 5%.

A $1.6 million investment at 5% generates:

$1,600,000 × 5% = $80,000 per year

The farmland generates $48,000 of gross rent and $43,000 after the $5,000 management expense.

So before taxes:

Treasury: $80,000 

Farmland: $43,000

That is a $37,000 annual cash-flow advantage for the Treasury.

But taxes change the comparison.

What Happens After Taxes?

Treasury interest is subject to federal income tax but is exempt from Minnesota state income tax.

Using an illustrative 24% federal marginal tax rate:

$80,000 Treasury income -$19,200 federal income tax = $60,800 after-tax income

That produces an after-tax cash return of approximately 3.80%.

Now look at the farm.

The $5,000 land-management expense is an expense associated with producing rental income and can generally reduce taxable rental income.

That means the landowner isn't paying income tax on the full $48,000 of rent in this example. Taxable rental income before any other applicable deductions would be approximately:

$48,000 rent - $5,000 management = $43,000

Using the same illustrative 24% federal rate and a 6.8% Minnesota marginal income-tax rate:

$43,000 × 30.8% = approximately $13,244 in income taxes

That leaves approximately:

$29,756 in after-tax cash income

On a $1.6 million property, that represents approximately a 1.86% after-tax cash return.

So strictly from annual cash flow, the Treasury remains well ahead.

But Farmland Has Another Return

This is where the comparison changes.

Farmland provides two potential sources of return:

Cash income + appreciation

Treasury interest provides income, but if a Treasury is purchased and held to maturity, the investor ultimately receives the principal value back. Farmland has the potential for the underlying asset itself to increase in value.

Take the same $1.6 million farm.

If it appreciates by an average of 2% annually:

$1,600,000 × 2% = $32,000 in appreciation

Add that to the approximately $29,756 of after-tax rental cash flow:

$29,756 + $32,000 = $61,756

That represents an economic return of approximately 3.86% for the year.

At 3% appreciation:

$1,600,000 × 3% = $48,000

Add the rental income:

$29,756 + $48,000 = $77,756

That brings the theoretical annual economic return to approximately 4.86%.

The important distinction is that the $32,000 or $48,000 of appreciation isn't cash in the landowner's pocket that year. It is an increase in the value of the asset.

Farmland Expenses Can Also Have Tax Benefits

The $5,000 land-management expense in this example reduces both cash flow and, when deductible, taxable rental income.

Other legitimate expenses associated with owning income-producing farmland may also reduce taxable rental income depending on the property and ownership structure.

These could include property taxes, certain repairs, professional fees, interest expense and other costs associated with managing and maintaining the property.

Certain improvements may also qualify for depreciation. Drainage tile is one agricultural example. The IRS identifies drainage tile as property that can have a depreciable recovery period.

The land itself, however, cannot be depreciated.

That distinction matters when evaluating farmland strictly from its gross rent.

The Comparison

Using our $1.6 million example:

Treasury investment

$1,600,000 invested 

5.0% yield 

$80,000 annual interest 

Approximately $60,800 after 24% federal income tax 

Minnesota income tax: generally exempt 

After-tax cash return: approximately 3.80%

Minnesota Farmland

160 acres 

$10,000 per acre 

$1,600,000 value 

$300 per acre rent 

$48,000 gross rental income 

-$5,000 land-management expense 

$43,000 taxable income before other applicable deductions 

Approximately $29,756 after illustrative federal and Minnesota income taxes 

After-tax cash return: approximately 1.86%

If the farmland appreciates 2%, the theoretical economic return increases to approximately 3.86%.

At 3% appreciation, it increases to approximately 4.86%.

That is the number I believe farmland owners need to understand.

What Does the Farm Need to Earn?

There is another way to look at it.

At $10,000 per acre, every additional $50 per acre of rent changes the gross capitalization rate by one-half percentage point.

$300 rent = 3.0% gross return 

$350 rent = 3.5% 

$400 rent = 4.0% 

$450 rent = 4.5% 

$500 rent = 5.0%

But getting a 5% gross return doesn't mean we can simply raise the rent to $500 per acre.

The farm has to support it.

Yield potential, commodity prices, input costs and tenant profitability determine what a farm can sustainably generate.

The Bigger Picture

Looking only at current cash income, a 5% Treasury has a significant advantage over a Minnesota farm valued at $10,000 per acre and renting for $300.

The farmland investor is accepting substantially less current cash income.

The reason that can still make financial sense is that farmland provides something different: an income-producing tangible asset with the potential for long-term appreciation, along with deductible ownership expenses and potential depreciation of certain qualifying improvements.

That makes the real question more than:

What is my cash rent?

The better question is: What is my total return on the $1.6 million asset I own?

For farmland owners, that means understanding cash rent, expenses, taxes, productivity, improvements and appreciation together.

That is where good land management becomes increasingly important. If an owner is accepting a lower annual cash return than competing investments, maximizing the long-term productivity and financial performance of the farmland becomes an important part of the investment strategy.

References

U.S. Department of the Treasury — Daily Treasury Par Yield Curve Rates

Internal Revenue Service — Publication 550, Investment Income and Expenses

Internal Revenue Service — Rental Income and Expenses

Internal Revenue Service — Publication 225, Farmer's Tax Guide

Minnesota Department of Revenue — 2026 Individual Income Tax Rates and Brackets

Author Bio: Raised in rural Wisconsin, Ben Tilberg developed a strong connection to agriculture and the outdoors early on, spending his youth in junior rodeo circuits and working within his family’s agricultural roots. He later served in the Army as a combat engineer before earning a degree in Agri-Business while managing operations on a cranberry farm. His career includes work as an agricultural scientist with Ocean Spray and as a Precision Agronomist, where he implemented advanced technologies to improve efficiency and sustainability. An official measurer for multiple wildlife organizations, he brings a deep respect for land stewardship to his work, helping landowners protect, manage, and maximize the long-term value of their property.