Minding Ag's Business

Farmland: Trophy or Investment?

Since 1950, average investors would have come out ahead buying farmland instead of stocks every year except 1978-1984, Iowa State University retired economist Mike Duffy found.

When Farmers National Co. sold another 80-acre Sioux County, Iowa farm for $20,300/acre this month, you could chalk it up as another trophy sale. The buyer won't necessarily expect a competitive return on investment anytime soon.

Local Dutch farmers 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).

"If anyone spends $20,000/acre on Iowa farmland, it's in Sioux County," says Dave Englund, a senior vice president with Farmers National. However, the same week a similar farm brought only $9,500 to $10,000/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."

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 concludes. 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 yearly increase 13 of the last 14 years and have rallied 369% since 2000 and 72% since 2010 alone. Comparing March 2014 to December 2000, the S&P advanced only 8%.

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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. Alternatively, you could own 457.06 shares the S&P worth $708,824, 72% of the land's investment even after reinvesting the dividends.

Investing at the previous peak of the land market--1980--would yield totally 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% of the stock market investment.

The amazing news is that in 63 years, land would have been a better investment in all years except 1978 to 1984. 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. A 46-year-old who grew up on a farm in the 1980s recalls how his parents struggled to make 18% mortgage payments on a 60-acre farm they bought in 1983.

"Looking back I don’t know how mom and dad did it," he tells me."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 adds. Today,Mom lives comfortably off the farm rental income.

Duffy doesn't speculate on future returns to either investment, since both farmland and stocks look a bit precarious at the moment. "Land's performance relative to the stock market over the past few years has been spectacular," he concludes. "Will this trend continue?...As the old saying goes, timing is everything in the success of a rain dance."

To read Duffy's full report, go to http://www.extension.iastate.edu/…

Follow me on Twitter @MarciaZTaylor.

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