An Updated Comparison of Farmland Versus Stocks

July 11th, 2014

The job of the investment adviser is to analyze the risk and returns of a variety of assets – from bonds to office towers, from international stocks to domestic timber, and everything in-between.  It’s not an easy task, as they must look at things such as income streams, volatility, appreciation, management costs, etc. The challenging part then, is to fairly compare all the assets against each other over time to see which may fit best for their clients in the future.

A recent study from Iowa State University compared two of the more popular investments recently, U.S. stocks (specifically the S & P 500 Index) and Iowa farmland, to see which has performed the best over the past several years.  Note that even though this report used Iowa as their benchmark for land, it’s likely that nearly all the corn/soybean states in the Midwest would have behaved similarly. The article (Comparing the stock market and Iowa land values: A question of timing) posted on the Iowa State extension website takes a critical look at how each has performed during specific time periods.

The graphs included in the article do a wonderful job of illustrating this timing phenomenon. From a practical standpoint, almost all assets look appealing at some point in their life cycle.  The key is to determine whether these attractive returns are simply a blip, or something that can be sustained over time. Currently, both farmland and stocks are at historic levels, so which way will each go from here? Can both assets be a good buy even at these levels?

In the past 30 years, I’ve invested in both farmland and the stock market.  Both have done very well at times, and both have nearly given me an ulcer.  I’ve always favored land as the “buy and hold” asset, while my stock allocations fluctuated.  One of the big differences between the two as Dr. Duffy points out – it’s a lot easier to get in and out of the stock market, if you only have a few thousand dollars, than it is to invest in land.  I’ve also always been a firm believer in diversifying my holdings across several assets just to spread the risk.  However, I will admit that no two people have exactly the same goals or risk tolerance so everyone needs to tailor their investments accordingly.  As the article points, both farmland and stocks have done well in the past so perhaps there isn’t a bad choice with either.

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More Corn Equals Higher Cash Rent?

May 30th, 2014

Recently, the University of Illinois FarmDoc Daily page published an article analyzing how cash rent prices and corn acres were related.  The results of the article (Does More Corn Mean Higher Cash Rent?) were that as more acres were devoted to corn, a higher cash rent was paid.  The main reason for this relationship is that typical operators can realize higher gross profits from corn than they can with most alternatives, mainly soybeans.  The tradeoff, as the authors point out, there can be a cost disadvantage with the more corn acres that are planted.  (Note – A previous FarmDoc Daily article discusses this side of the equation – Is There an Advantage to More Corn Acres in your Rotation).

As you will see from reading the above-linked articles, this data comes from a number of farmers across the state and it’s important to keep in mind that not every farm operates on the same margins as the neighbor down the road.  The best thing a landlord can do is to stay in communication with their tenant about what lies ahead the next year.  In a perfect world for a landlord, rents would increase in a liner fashion every year and there would be no concerns.  However, in reality every year is a little bit different and mother nature always has a say as well (see the drought of 2012), so it’s always good to approach each year independently.

Interesting (and Fun) Facts About U.S. Agriculture

May 19th, 2014

Every five years, the United States Department of Agriculture surveys farmers and landowners across the country to learn more about the industry. The 2012 report was just released (2012 Census of Agriculture) and it is packed with 695 pages of information. Also included in this edition is data from 2007 so casual readers and researchers alike can compare and contrast the two time periods. From this analysis, you can gain a perspective of how the various segments of U.S. farming have evolved.

To say the amount of information included in this report is mind-boggling is an understatement. Following are just a few of the more interesting facts I’ve come across:

1. Three quarters of all farms had sales of less than $50,000, producing only 3 percent of the total value of farm products sold. Those with sales of more than $1 million (4 percent of all farms) produced 66 percent.

2. The top 5 states for agricultural sales were California ($42.6 billion); Iowa ($30.8 billion); Texas ($25.4 billion); Nebraska ($23.1 billion); and Minnesota ($21.3 billion).

3. Eighty-seven percent of all U.S. farms are operated by families or individuals.

4. Principal operators were on average 58.3 years old and were predominantly male. Second operators were slightly younger and most likely to be female, and third operators were younger still.

5. Young, beginning principal operators who reported their primary occupation as farming increased 11.3 percent from 36,396 to 40,499 between 2007 and 2012.

6. Organic sales were growing, but accounted for just 0.8 percent of the total value of agricultural production. Organic farmers reported $3.12 billion in sales in 2012, up from $1.7 billion in 2007.

7. A total of 474,028 farms covering 173.1 million acres were farmed with conservation tillage or no-till practices.

8. Corn and soybean acres topped 50 percent of all harvested acres for the first time.

If you’re inclined to learn more, I would suggest that you first browse through the “Table of Contents” located on Page 3 of the .pdf report in order to narrow the focus of your search. Keep in mind that the information presented is simply the average of all the respondents that replied and may or may not apply to your specific farm. I personally found this report to be fascinating as it confirms the complexity, size, and scope of the greatest industry in this country – agriculture. Happy reading!

Pollution and Its Impact On Farmland

May 2nd, 2014

With the world population now exceeding seven billion people, one of the biggest concerns in both agricultural and governmental circles is if and how we will be able to produce enough food for all the earth’s inhabitants. While these are rather daunting questions, I personally believe that we can successfully meet these challenges, assuming we have:

1. An adequate supply of farmable land;

2. An increase in the productivity of each acre farmed (due to technology); and,

3. An adequate supply of water.

Many experts believe that the land supply issue is the least important one – after all there are millions of acres across South America and Africa that could be converted to farmland in the future. Beyond the negative environmental havoc that this conversion would create, there are several economic obstacles to overcome as well, e.g., building the necessary infrastructure to support the new agricultural enterprises. That said, will new land be brought into production? Absolutely! Will this new land magically solve our land supply problem? Don’t bet on it – read on.

Some recent news from China may totally change the assumptions that we’ve relied on in the past to predict the number of acres that can be utilized in the future for food production. Many models have always assumed that the vast majority of acres currently being farmed would remain that way. However, a recent article posted on the New York Times web site, (One-Fifth of China’s Farmland Is Polluted, State Study Finds) points out a very disturbing fact – millions of tillable acres in Asia and Europe are now so polluted from agricultural and industrial waste that they may at some point be taken out of production. According to the Times article, nearly 50 million acres of China’s farmland has been contaminated, or an area nearly twice the size of Illinois. A second article on the Times website (Pollution Rising, Chinese Fear for Soil and Food) examines the impact this is having on the Chinese population – increasing rates of cancer and other ailments just to name a few. Sadly, some countries so badly wanted to expand their economies that they never considered the impact on the environment. Could they have simply traded prosperity today for hunger tomorrow?

As we are learning, assuring an adequate supply of farmland in the future may not be as easy as it seems. Fortunately, most farms in the Midwest do not have the same contamination problems that they do in other parts of the world, which will only make them more valuable in the future.

The California Farmland Market

April 13th, 2014

In our last two posts, we’ve provided insight into land value trends in Iowa and Illinois. Since corn and soybeans are the most dominant crops being grown in the Midwest, typically land values in the two states will move in concert with each other as both are equally affected when grain prices move up or down.

This week we’re going to look at a recent land value study from California. The report (Trends in Agricultural Land and Lease Values), compiled by the California Chapter of the American Society of Farm Managers and Rural Appraisers, looks at both row crop acreage and permanent plantings. The “Golden State” leads the U.S. in terms of agriculture sales each year (for perspective – Iowa is second and Illinois is seventh) and grows over 400 different crops. This crop mix is the direct result of a diverse climate and a wide variety of soil types.

After reading the report, you quickly learn that the most important issue currently in the far west is the availability of water. Unlike the Midwest, where we rely almost entirely on rainfall for our crops, California agriculture depends heavily on irrigation. That doesn’t seem like a problem until you realize that the demand for water far exceeds the supply. This creates a scenario where agricultural interests have to compete against metropolitan areas for water. And different crops have to compete against each other to determine which has the greatest economic return relative to the amount of water used.

With the world’s population continuing to grow at a rapid pace, I personally believe that there will be three constraints to producing an adequate supply of food in the future: 1. the amount of land available for crop production; 2. the rate at which new technology can increase the output for each acre being farmed; and, 3. access to reliable sources of water. Farmers in California are on the front lines of this war for water. And even though it might seem like an irrelevant concern to those farming in the Midwest today, I think it’s an issue that will become quite important at some point in the future. Sooner versus later water will replace oil as the world’s liquid gold.  And to think, most of the growing areas across the Corn Belt get this resource for free.