Farmland versus Gold – Buffett’s Thoughts

May 10th, 2012

It’s been stated often that in times of financial uncertainty, investors should seek hard assets such as precious metals or farmland.  During a May 7th interview on a popular CNBC show (Warren Buffett on Squawk Box), one of the premier investors of our time weighs in with his thoughts regarding the differences between gold, farmland, and other investments.  Below are some selected excerpts from the program that confirms what I have believed for years… over time gold’s hype has often exceeded its returns when compared to other assets.

JOE: … Warren in the past has talked— he’d rather own all the farmland or whatever than gold, but that was throwing down the gauntlet after all the gold bugs. Classic. I love arguing and I love, you know, stirring things up…

BECKY: You had a shareholder who asked you a question about gold over the weekend and your response was pretty interesting – Berkshire vs. gold. You want to talk about how that’s performed over the years?

BUFFETT: Yeah, but we can go beyond that. But— certainly, when we took over Berkshire, Berkshire was selling at $15 a share and gold was selling at $20 an ounce. And then gold is now 1600 and Berkshire’s 120,000. But you can take a broader example of that. If you— if you buy an ounce of gold today and you hold it 100 years, you can go to it every day and you could— you could coo to it and you can caress it and you can fondle it and 100 years from now you’ll have one ounce of gold and it won’t have done anything for you in between.

If you buy 100 acres of farmland, it will produce for you every year. You can use that money to buy more farmland; you can do all kinds of things. For 100 years it’ll produce things for you and you still have 100 acres of farmland at the end of 100 years. You could buy the Dow Jones industrial average for 66 at the start of 1900. Gold was then $20. At the end it was 11,400. But you’d have gotten dividends for 100 years. So a productive asset of any kind, a decent productive asset, is going to kill a nonproductive asset over time. Now, in any given one-year period, five-year period, any asset can outperform another asset…

With land you can get somebody else to do all the work, give them a percentage of the crop, and you can sit back there for a hundred years and get a percentage of the crop and you’ve still got the land when you get all through. I will guarantee you that farmland, over a hundred years, is going to beat gold, and so are— so are equities.

The one advantage that gold has over farmland is that, for the small investor, it’s much easier to purchase, e.g., an investment in a small 40 acre tract in Central IL may now take $400,000 to buy while an investment in an ounce of gold may only cost $1,600. Unfortunately, however, as Buffett points out, that ounce doesn’t earn an annual return during your holding period. Bottom line – you may not totally agree with the “Oracle of Omaha’s” opinion, but he has proven over time to know quite a bit about investing.

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Farmland Investors Continue to Ramp up Interest

May 2nd, 2012

Recently, the Global AgInvesting Conference was held in New York City, and the strong attendance was a reflection of the popularity that farmland has amongst investors.  According to an article published on Reuters (Investors Eager to Expand into Agricultural Assets) 700 people attended the conference, which was twice the amount of attendees from the same conference  in 2009.  The main buzz at the conference was row-crop land and the level of interest in the asset is arguably as high as it has ever been.  The long-term demand for food and fuel are leading investors to put more funds into farmland with the intent of seeing steady annula returns along with appreciation in the underlying asset.  According to attendees surveyed at the conference, they expect to add roughly 17.3 billion in farmland assets over the course of the next 3 years.

While all accounts of the mood at the conference was very positive overall, there are some concerns from portfolio managers as they see the interest in farmland grow.  Man of the investors who may be new to farmland need to be educated on how to evaluate farmland and its income streams.  They also need to know how to value it properly to know they are investing at a responsible price, just as they would with a mutual fund or any other investment.  The article mentions that these investors will need to rely more and more on farm appraisers and managers to make sure the investment is a sound one.

Up to this point, we have seen a good mixture of investor and local buyers at our sales.  Backed with cash from profitable harvests the last few years, farmers have been able to compete with investors, and in many cases, outbid investors for land.  The results of this competition amongst buyer groups has pushed land prices to record high levels in many areas.  From all indications, it appears that the investor-buyer will be here to stay for the foreseeable future.

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Update on Ethanol

April 25th, 2012

Most of the farmland experts agree that the expansion of the ethanol industry beginning in 2006, with its accompanying demand for corn, was the primary driver that lit the fire under farmland prices.  Much of the growth was underwritten by government subsidies that included a tax credit to the producers.  When discussion about eliminating this credit at the end of 2011 became public, supporters of ethanol were convinced that it would be the death knell for the industry.  Recent anecdotal evidence, however, suggests otherwise.

An April 11, 2012 article written by Dustin Dwyer that appeared on Changing Gears website (Don’t Call It a Comeback: Ethanol Is Bigger Than Ever) provides an overview of the current state of the industry. And surprisingly, things appear to be going quite well even without the tax subsidies.  The demand for ethanol is high at the present due to the federal mandate that requires that auto fuel contain a certain percentage of the product.  This percentage is to increase in the future, which will lead to even greater demand for ethanol, and ultimately corn.  Existing ethanol plants are running at capacity and plans for new refineries are being drawn up. This seems to indicate that these businesses are profitable and that they’ve shaken off past problems.  Some would argue that the profitability is an offshoot of high oil prices.  Undoubtedly, oil prices do impact the ethanol industry but many of the existing refineries are now better able to adapt to erratic oil prices and can withstand the risks of the business.

I’m still not convinced that corn based ethanol is a long term solution that can solve all of our energy problems.  At some point, I believe that plant cellulose will be a better alternative, as it will utilize an input that is not currently being used for food or feed.  In the interim, demand for corn (and ultimately corn prices) will likely remain strong, which bodes well for the stability of Midwestern farmland prices.

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How Might Early Planting Affect Crop Yields?

April 6th, 2012

In most areas of the Midwest, the balmy Spring temperatures have reminded us more of June than March/April.  With those temperatures, many farmers decided to get into their fields early to get a jump on corn planting.  Most are banking that we have passed the point where we can expect a huge drop in the temperature and a hard frost.  However, as the saying in Illinois goes, “If you don’t like the weather…wain until tomorrow”, so it is anyone’s guess what the remained of spring will bring.  What will be interesting to watch is how the yields turn out for the corn that was planted at earlier than normal dates.  In a recent article on the University of Illinois site FarmDoc (How Much Impact Will Early U.S. Corn Planting Have on Potential Yield?) the authors looked at some historical data to try and predict the 2012 crop.  What they found is that historically there has not been any significant yield increase for planting early.  However, there is a significant decrease in yield production for planting late (after the 1st week of May).  So, while the farmers that got in their fields early may not see much of a difference, in aggregate the yields across the Midwest have a better chance of being very strong this year because the chance of late planting looks to be significantly decreased.  But as the authors note, as with every growing season, yields will be heavily dependent on rainfall during the summer.

As of right now, the farm market is holding steady and still slightly trending upward.  Once we get into late summer yields should be relatively well known. We will be able to get a better handle on what corn and bean prices will be, which  will ultimately affect the demand for (and price of) farmland.

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Interest in Organic Farmland Expanding

March 27th, 2012

Whether you personally purchase a little organic food, or a lot, consumer demand for this product group is continuing to grow.  In the past, the farmer growing the crops owned most of the land that organic food was being grown on.  Owning versus renting the farm was really the best way of ensuring that the many years invested in getting a tract certified for organic production would not be undermined by the whims of a landlord.

Today, the rules of organic farmland ownership are changing.  There are now many people who are looking to capitalize their belief in the future of healthy eating into a long-term investment.  A recent article by Ann Dwyer in the on-line edition of Crain’s Business Journal (Impact Investors Target Midwest Farmland to Grow More Organic Food) spotlights what David Miller has been able to accomplish with his company Working Farms Capital. Over the past 5 years, Dave has pooled the resources of several investors and bought numerous tracts throughout Illinois.  These farms have primarily grown traditional crops (corn, soybeans, wheat, hay, oats) in an organic way, but now the partnerships are looking to purchase parcels for raising organic vegetables that would ultimately be sold to local consumers.

These new groups of people are referred to in entrepreneurial terms as “impact investors”.  In the case of Working Farms Capital, their mission is to impact local and organic agriculture, and to bring more local and healthy foods to more people.  Undoubtedly, it’s a slow process as they are reversing part of the history of the organic industry – instead of farmers owning the land and trying to attract outside capital to assist in expanding their land base, it’s now the outside investors that are buying the land and searching for farmers to grow crops and produce in an organic/sustainable way.  As the demand for organic foods continues to expand, this new method may be the ideal way for a person to incorporate a core belief about food into a solid long-term investment.

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