Monday, March 18, 2013

Farmland -- A Better Investment Than Stocks!

A 10% to 15% increase in value every year has made farmland an enticing investment opportunity, especially when compared to an equities sector that's had trouble returning much of anything to investors. This dynamic has caused many investors to question which market's the safest place for their money: Land or stock.
Up until about the last 6 months, the last 5 years have been devastating to the stock market. But, the recession's faded and stock prices have rebounded. 
"Iowa farmland values have shown yearly increases for 11 of the past 12 years. The values remain at record high levels where they have been for the past 9 years. Iowa land values have increased by double digits eight of the past 9 years. This year marked the third consecutive year that values have increased more than 15%. The estimated land values have increased more than 2 1/2 times since 2003," says Iowa State University Extension ag economist and farmland values expert Mike Duffy. "The composite value of the stock market, as measured by the Standard & Poor’s Index (S&P) average, has started recovering from the disastrous 2008 year. Even though the S&P lost 34% of its value between 2000 and 2008, its overall record has been impressive since 1990. Stock values rose from 328.75 in 1990 to a December 2012 close of 1,422.29, an increase of over 300% in spite of the decline in 2008."
Investment variables
So, which is the best place for your investment dollars? There are a lot of moving parts to the equation, and it requires a few assumptions on price direction and how returns for both markets will be gleaned, whether through capital gains, dividends or other means.
"The returns to land or stock shares are composed of two parts. The first is capital gains or the in­crease in value. Obviously, this also could be a capital loss if values decrease. The second component is yearly returns," Duffy says. "Owning land has an unavoidable annual ownership cost not associated with stocks. Property taxes must be paid and should be included in a comparison of owning stocks or farmland. Additionally, if farmland is held as an investment and not by an owner-operator, there could be a professional farm manager involved and the fee for this service would have to be considered. There is also a need for some maintenance and insurance with farmland not associated with owning stocks."
All of these add up and, though land's still a strong spot for investment money, they chip away at total land returns, Duffy adds. "Land taxes, a management fee, insurance and maintenance are the only ownership costs considered for land. There is no ownership cost assumed for stocks," he says.
Wildcards looking ahead
There's been a lot of speculation over the last few months about whether land values have reached their tipping point and will start to decline soon, especially among the growing thought that today's high commodity prices -- the primary factor underpinning today's land market -- will slip based on expectations for a big crop this year.
"The value of land is determined by its income earning potential. For the most part, in Iowa, that means the returns to corn and/or soybeans. Returns will be influenced by a number of factors over the next several years," Duffy says. "Oil prices, ethanol prices, crop yields, costs of production, economic recovery, alternative biomass sources, and a host of other major issues will have an influence on the price of land."
THat could have land price implications in the shorter term; changing landowner demographics, however, could affect the viability of land as an investment vehicle in the longer term, Duffy says.
"In 1982, 12 percent of the farmland in Iowa was owned by someone over 75 years old. By 2007, this percentage had more than doubled to 28%. In 2007, over half, 55%, of the farmland in Iowa was owned by someone over the age of 65. How this land will be transferred from one generation to the next is not entirely clear at this time. It appears that the majority of it will be passed on to the children, usually in equal shares. This means there will be more landowners and more out of state owners," Duffy says. "Whether they will they want to continue to own the land or sell it is unknown. Too much land being offered for sale is not a problem at this time, but it could become one if the next generation doesn’t want to hold on to the land."
All the variability doesn't lie on the farmland side, though. There's just as much potential volatility in the equities, especially considering there's still a lot of economic uncertainty around the world.
"The performance of the stock market for the next few years is also not clear. The U.S. stock market will be impacted by what happens in the European Union and China among other places in the world. We are no longer insulated from the economic conditions throughout the world," Duffy adds. "The imbalance of trade is another area of uncertainty with respect to possible impacts on the U.S. economy and the performance of the stock market and the land market."
The verdict
All things considered, there's still a lot of promise in the farmland market for investment. It's been strong in the last few years, though there's a lot of uncertainty looking ahead -- much more so than in recent years, Duffy says. And while the answer's not clear-cut or simple, farmland will remain a strong contender for investment potential in at least the short term.
"Land and the stock market are different types of investments and assets. This simple comparison was based strictly on averages. There are a number of individual stocks that perform better than the S&P. But there are some that don’t perform as well. Anyone contemplating the question of which is a better investment needs to know his or her goals," Duffy says. "Land’s performance relative to the stock market over the past few years has been spectacular. Will this trend continue? Time will tell. Which is the better investment? As the old saying goes, timing is everything in the success of a rain dance."