Last week I discussed the investment performance of Illinois Farmland, when compared to other asset classes and investment indices since 1970. The research I sourced for the post was completed by Bruce Sherrick, Ph.D., from the University of Illinois. The bottom line of Dr. Sherrick’s research showed that Illinois farmland performed very favorably when measured against nearly every other investment type, whether stocks, government or corporate bonds, real estate investment trusts (REITS), commercial paper, or emerging markets. Which all begs the question, why don’t we all own some farmland? I believe there are several reasons for why normal, everyday investors choose to bypass including some farmland holdings in their respective investments portfolios.
The first may involve a lesser degree of liquidity. All real estate – whether a farm, home, or commercial building – is generally less liquid than that of a stock or bond. I can always login to a TD Ameritrade or e-Trade account, and almost instantly sell my stock holdings. Real estate purchases and sales are usually more involved, taking more time and often at a higher cost, than that for stock or bond investments. This creates a barrier for some potential land investors.
Second, investing in farmland normally involves a larger initial investment. Unlike an investment in stock mutual funds for my Roth IRA, it can be difficult – if not impossible – to purchase $5000 worth of farmland. An 80-acre tract of land in central-Illinois can command as much at $8000 per acre, or $640k total, which can make entry into farmland ownership somewhat difficult for many individuals. While there are obviously smaller tracts of land that can be purchased, an 80-acre tract is not “large” by today’s operational farmland standards – and this fact can create a real barrier to entry for many potential landowners.
Third, normal stock and bond investing involves more clear and efficient information. If you want to learn about a particular company, you can jump on the Internet and do oodles of research on individual stock holdings through Yahoo or Google. And new information for these markets is available every minute of every trading day. By contrast, the farmland market can be less clear and efficient, and has a somewhat higher learning curve. If you didn’t grow up on a farm, where you learned the true ins-and-outs of agriculture, learning about farmland ownership and operation can be challenging. In addition, as an individual with little or no farm experience, figuring out who you can trust can be equally challenging.
Next, for some people, farmland isn’t as exciting as other investment alternatives. Sure, the return history and general stability of farmland as an investment are clear. But farmland is not fancy – after all, we’re talking about dirt, here! And to that end, some investors prefer to operate in what they perceive to be a more “sophisticated” manner (e.g., think credit default swaps). The currently steady 3-5% annual cash returns, isn’t something you’d often brag about at a cocktail party – even though a steady 3-5% (excluding appreciation) looks tremendous when compared with the recent whipsaw in stocks.
Finally, for many people, farmland doesn’t even hit their radar when considering investments because they are so removed from it. Farmland is not like stocks, bonds, and many other asset classes that are actively marketed to the masses by large multi-national firms. Sure, farmland brokerages and land auction companies work very hard to ensure that land offerings are well known. But when you consider the likes of e-Trade, for example, which runs Super Bowl commercials featuring talking babies – and countless other investment companies with massive marketing budgets – farmland as an investment alternative doesn’t seem to be as ingrained in the psyche of the public as other investment offerings.
So while it’s clear that farmland has proven itself as a great long-term investment, there are several reasons that a limited number of people actually own farmland. However, if you are interested in adding farmland to your investment holdings, be sure to contact a firm and/or individual that have experience in the marketplace. Make sure you do your homework on the firm and/or individual – ask for references, specific property experience, and put a sharp pencil to the particulars of any deal. With a little work you, too, may find that owning land can be a very worthwhile venture.
