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Thursday, March 08, 2012

Should You Have Invested In Farmland Or Stocks?


Wall Street fund managers pump money in and out of the commodity market whenever there is a few cents that can be made.  But you wonder why they are satisfied with only pennies, when they could be making dollars by investing in the land market.  While it does not go up and down and allow money to be made on both short and long positions, it has risen steadily over time and has outperformed the Standard and Poor’s Index.  It does not take much to realize farmland has been a better investment than Wall Street.

In a comparison of recent years, including some good years for the stock market, Iowa State University economist Michael Duffy evaluated the performance of the S&P alongside Iowa land values. 

Land values:  Based on the Iowa State University Land Value Survey, the 2011 estimated average farmland value in Iowa was $6,708 per acre. This was an increase of 32.5 percent from the 2010 estimate. Since 1990, the estimated average value of Iowa land has risen more than fivefold, going from $1,214 to $6,708 per acre.

S&P Index:  Even though the S&P lost almost 32 percent of its value between 2000 and 2008, its overall record has been impressive since 1990. Stock values rose from 328.75 in 1990 to a December 2010 close of 1,243.32, an increase of nearly 400 percent in spite of the decline in 2008.

Looking at various yardsticks to measure the performance of the investments, Duffy looked at capital gains and yearly returns.  For farmland, Duffy says the unavoidable cost is the property tax, and possibly the cost of a professional farm manager, as well as insurance and maintenance costs.  He did not assume any ownership cost for the stocks, including transaction costs.  Any rent on the farmland or dividends from the stocks was re-invested to purchase more.

To equate the two assets from an equal point, Duffy invested $1,000 in each alternative at their 1960 values.  That investment purchased 3.83 acres of land and with the addition of net rent and subtraction of costs; the net gain of $42.50 would purchase additional land for a total of 3.99 acres.  At the same time, a $1,000 investment in the S&P would have purchased 17.6 shares.  At the end of 2011 an investor would have 34.20 acres of farmland worth $229,396 or 78.36 shares of stock worth $97,427.

While the S&P would have been only worth 42% of the farmland, if both were purchased in 1960, there are other periods of time in which the comparison would be different. 

1) If purchased in 1970, the $1,000 would have purchased 2.39 acres of land or 11.1 shares of the S&P.  By 2010 the land would have been worth $93.335 and the equity would have been worth $45,373, or 49% of the value of the land purchase.
2) If purchased in 1980, the $1,000 would have purchased only .48 acres of land and only 7.49 shares of the S&P index.  By 2010 the land would have been worth $13,275 and the S&P investment would have been worth $20,187, or 66% of the value of the stock.

Duffy says the timing of the investment makes a difference, and the land would be the better investment except if it were purchased between 1974 and 1984, because it coincides with the rise of land values.

Regarding the next several years, Duffy said the future is hard to predict, but there are several factors that will have an impact on land values.  He said the value of land is determined by its income-earning potential, which means the returns to corn or beans; and those can be determined by: Oil prices, ethanol prices, crop yields, costs of production, economic recovery, alternative biomass sources, and a host of other major issues.  He said another uncertainty is landowner demographics, which are changing.  Because the majority is owned by someone over 65 years of age that means it will change hands, and in many cases to a younger generation in equal shares, which means smaller tracts and more owners.

Duffy said if those people do not want to own the land and sell it, then more land will come on to the market, which is not a problem now, but could be one later.  On the other hand, the future of the stock market is unknown, but if the budget deficit grows it will place a burden on the economy and the stock market will reflect that strain.

A comparison of investments involving farmland and stock equities indicates that land is a better investment, but it depends on when it was purchased.  A purchase during times of rapid land value growth will be a detriment to the long term ownership, relative to alternative investments, such as stocks.  The future of those investments must also be considered, and different dynamics are at play for each of those.

Posted by Stu Ellis on 03/08 at 12:06 AM | Permalink


Farmland is a good investment, no doubt. Has it beaten the stock indicies? Depends on when you bought and sold and which indicies. Both farmland and stocks have been good investments. I believe that today's farmland prices are in an extreme bubble that will burst soon, so it will be interesting to run the calculation post-bubble. But the biggest point I would like to make is that well selected "forever" stocks have crushed both farmland and stock indicies. If my Grandpa has purchased shares of Procter and Gamble or Colgate Palmolive (pretty boring, well known stocks) in the 1970s instead of another farm we would have enough money to buy half the county. The S&P index includes great companies like the ones I mentioned and crummy ones too that just happen to be big. If you look at just the truly great blue chips they have beaten farmland handily over the long run. Also, a great business will always be a better investment than farmland. My farmland will never be able to deliver 10 percent profit growth indefinitely. If you offered me $5M in farmland today or $5M in P&G stock, I would take the P&G stock? Why, because they have raised their dividend at 10% per year for 40+ years rain or shine. Do you think cash rents will go up 10% per year every year no matter what for 40 years. No way. Not only that, but in today's environment cash rent and farm income could be cut in half instantly if interest rates rise or corn ethanol is replaced.

Posted by: Deputy Stumpy at March 8, 2012 12:12PM

In my opinion both alternatives would have been a good investment and many people do not think of farmland as a viable purchase compared to stocks and bonds. As food takes more precedent I think the situation will change. Both are volatile in their own way but land for food use will never go away. So there are positives and negatives.

Posted by: Lulaine at March 9, 2012 2:02PM

Should farmers be investing their capital into more farmland? I contend that they should invest the extra capital into a nonfarm related, individual retirement account (IRA) of 401K. They could invest a significant portion of their taxable income “pre-tax,” lowering the amount of taxes to be paid today (consult a professional tax advisor for details). This should be done especially if they have a second generation joining the business. When the farmer retires they will need to start taking money out of the farm to support their life change. If the farm economy were to change, the farm could be weakened financially to the point of losing a competitive edge. Funds set aside in and IRA or 401K plan could help to fund the retirement, without cannibalizing the farm in the process.

Posted by: Tom Neher at March 14, 2012 8:08AM

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