|
Historical Returns
Farmland has historically produced respectable returns with relatively low risk. According to the Iowa State Land Value Survey, farmland values in Iowa have increased at an average annual rate of 5.8%, not including any rental income, since 1957. The NCREIF Corn Belt Farmland Index shows a total return of 11.43% from January 1991 to December 2008 (6.75% Appreciation, 4.46% Income). The graph and chart below illustrate how Corn Belt farmland, according to the NCREIF Index, has performed against the S&P 500.
|
.png) |
| |
Past performance is no guarantee of future returns. |
|
Tax Benefits
There are several tax benefits to owning farmland. Improvements to farmland, including drainage tile, levees and terraces can be depreciated on a 10 year schedule. Farmland can be held in an IRA and can be used in 1031 like-kind exchanges with any other type of real estate to minimize capital gains taxes.
|
Risks
|
|
As with any investment, there are risks associated with owning farmland. Both land values and rental rates will fluctuate in the future. Commodity markets and government policies can influence farmland values and rental rates. There are, however, several factors that make an investment in farmland favorable when compared to other real estate investments.
Housing, retail space and office space all need to be consumed on site, they are very dependant on the local economy. Because farmland produces internationally traded commodities, it is much less dependant on the local economy than other forms of real estate. There are no renovation expenses when tenants change or when a tenant decides to produce another crop. Farm operations are highly scalable, in order to rent an additional 300 acres, for example, most farmers would not have to hire additional employees or purchase additional machinery. This makes the market for rentable farmland very competitive.
As long as people eat, productive farmland will have value. Unlike stocks or bonds, there is no underlying company to go bankrupt or miss analyst expectations on an earnings report. Office buildings and retail space will physically depreciate, there will be repairs that need to be paid for and eventually the buildings will become obsolete, properly managed farmland will not.
Liquidity
Farmland is not considered a liquid asset. In the event that an investor needs to divest from a purchase of farmland, it can take between two weeks and four months for a full price sale to take place; like any other real estate, however, it is relatively easy to borrow against farmland and unlock 70-80% of the equity in the land. There are also transaction costs associated with selling farmland; realtors can take 3-5% of the gross value of the land for their services. For these reasons, it is recommended that anyone who considers an investment in farmland does so with a long-term horizon in mind.
|
Favorable Trends
|
|
Farmland Held in Strong Hands
Farmers, institutional investors and individual investors all hold farmland, with farmers being by far the largest group. Recent prosperity in agriculture has put farmers in a strong financial position. According to Iowa State University, 72% of the land in Iowa has no money borrowed against it. In fact, farmers’ debt-to-equity ratios are at an all time low. These facts may not force farmland to appreciate as it has in the past, but they should limit the possible downside if we do experience a setback in land values.
|
.png) |
|
Inflation
Farmland is a hard asset that produces internationally traded commodities. The value of farmland has outpaced inflation historically and performed very well during times of above average inflation. For example, during the inflationary period of 72-81 in which the consumer price index averaged a 9.2% annual increase, Farmland values in Iowa, before any rental income, increased at an average rate of 18.1%. Because of this, many view farmland as an excellent asset for long term wealth preservation.
Alternative Energies
Of all the alternative energies being explored at the moment, biofuels have the most direct impact on agriculture and therefore farmland. Ethanol produced from corn and biodiesel produced from soybeans will not be the final solution for our energy problems. Cellulosic ethanol, the next generation of biofuels, which can be produced from any plant material including fast growing poplars trees, switch grass or corn fodder, and those crops will compete with food crops for acreage.
Alternative means of producing electrical energy will also impact farmland. Large parts of the Corn Belt are in favorable wind regimes. Productive winds and proximity to energy markets has helped Iowa become the nation’s second largest producer of wind energy with 2,800 Mw worth of capacity installed. Each wind turbine requires roughly two acres of land.
Technology
Thanks to biotechnology, commercial fertilizers, and improved farming practices, the productivity of American farmland has been steadily increasing. For example, the average corn yield in Iowa has increased from 48.5 bushels in 1950 to 171 bushels in 2008. Even more impressive, is that labor inputs to achieve these yields have actually decreased. Monsanto, Dow Chemical, Mosaic and John Deere are working to create better seeds, herbicides, fertilizers and machinery which make farmland more productive. The competition for productive farmland translates these increases in productivity into increased land values and rental rates.
|
.png) |
|
Increased Demand for Food
According to the UN, the world’s population will reach 9.2 billion by the year 2050, up from 6.7 billion today. Not only will there be more mouths for farmers to feed, but an increasing number of these people will be moving up the food chain, consuming more calories and meat, as their economies develop. It takes roughly seven pounds of grain to produce one pound of beef. Even a slight change in the diet of the developing world has major implications for agriculture.
|