Farmland prices: Paying for a trophy or an investment?

Jun 27, 2014
by DTN

When Farmers National Co. sold another 80-acre Sioux County, IA, farm for $20,300 per acre this month, observers chalked it up as another trophy sale. The buyer won’t necessarily expect a competitive return on investment anytime soon, but did acquire a prized possession.

Local farmers of Dutch descent still possess plenty of cash, feel prime farmland remains scarce and are willing to pay premiums for certain properties (usually when bidding against the farmer next door), realtors explained.

“If anyone spends $20,000 per acre on Iowa farmland, it’s in Sioux County,” said Dave Englund, a Senior Vice President with Omaha-based Farmers National. However, the same week a similar farm brought only $9,500-10,000 per acre, which is more reflective of the local market, he added. “Good quality land still brings good money, but marginal land is what is bringing a drop in prices in some areas.”

Timing your buy

What you pay for farmland and when you buy it makes a huge difference in how real estate stacks up as an investment, a new study by retired Iowa State University Economist Mike Duffy concluded.

He has just updated an analysis of how average Iowa farmland ranks compared to investing in the S&P 500 Index since 1950. This hardly seems like a fair fight since Iowa land values have shown a yearly increase 13 of the last 14 years and have rallied 369 percent since 2000 and 72 percent since 2010 alone. Comparing March 2014 to December 2000, the S&P advanced only 8 percent.

But timing is everything. If you invested $1,000 in 1950, and reinvested the proceeds each year into more farmland, you’d own 113.75 acres today worth $978,222, Duffy said. Alternatively, you could own 457.06 shares in the S&P worth $708,824, 72 percent of the land’s investment. The analysis adjusted for land’s holding costs—including taxes, maintenance and farm management fees. It counted stock dividends and cash rent as income.

Investing at the previous peak of the land market—1980—would yield to tally different returns. By 2013, the initial $1,000 land investment would have grown to $25,129 while the S&P investment would have been worth $37,868. In this flip flop, land would have been worth only 68 percent of the stock market investment.

Duffy’s conclusions mirror similar studies by University of Illinois Economist Bruce Sherrick, Director of the TIAA-CREF Center for Farmland at the University of Illinois. By Sherrick’s account, a 26-state market basket of farmland has outperformed many other asset classes from 1990-2013, returning an annual average of 10.87 percent versus 7.48 percent for the Dow Jones and 6.44 percent for AAAbonds. If you include the 1970s and 1980s, farmland returns still averaged 11.73 percent annual gains. Stocks averaged 6.89 percent during this 43-year period and actually fluctuated far more than land.

Compared to other assets, “the relative riskiness of farmland looks quite attractive,” Sherrick said.

The amazing news is that in 63 years, land would have been a better investment in all years except 1978 to 1984, Duffy said. So if you dabbled in the land market frequently, you’ve amassed a portfolio that has overcome those setbacks.

Time also has a way of correcting mistakes and this can benefit buy-and-hold farmland owners over day traders. Michael, now a 46-year-old real estate trust manager, recalled how his parents struggled to make 18 percent mortgage payments on a 60-acre farm they bought in 1983.

“Looking back I don’t know how mom and dad did it,” Michael said in an email to DTN. “We did not have new equipment, no new trucks or cars, no vacations, just food and clothes and the house payment. Mama talks about the insurance policies and other bills that she had to let go because she could not pay. Some of those decisions were good ones, others not so much. It was hard. Even as a kid I knew it was hard.

“Dad retired from farming in 1993 due to his health and passed away a short time later. Mom made the last five land payments using the farm rental income,” he added. Today, Mom lives comfortably off the farm rental income.

Duffy doesn’t speculate on future returns from either farmland or stocks, since both markets hover near record peaks at the moment. “Land’s performance relative to the stock market over the past few years has been spectacular,” he concluded. “Will this trend continue? ... As the old saying goes, timing is everything in the success of a rain dance.” — Marcia Zarley Taylor, DTN