This is usually a slow time of the year for farm sales. It’s past prime planting season. Yet, Sam Kain, Des Moines area manager for land sales at Farmers National, is busy. He has 3 auctions this week. Most of the 30 or so bidders who show up will be farmers. But an increasing number of people buying land these days have no intention of planting seeds, at least not themselves. They are investors and a growing number of them are getting interested in farmland.
Just how hot is American farmland? By some accounts the value of farmland is up 20% this year alone. That’s better than stocks or gold. During the past two decades, owning farmland would have produced an annual return of nearly 11%, according to Hancock Agricultural Investment Group. And that covers a time period when tech stocks boomed and crashed, and housing boomed and crashed. So at a time when investors are still looking for safety, farmland is becoming the “it” investment.
The New York Observer recently had a story saying more hedge funders have been talking farmland. Successful Canadian hedge fund manager Jean-Francois Tardiff, recently said he liked farmland. And a number of investors who gained fame for calling the housing crash, including Michael Burry and Passport Capital’s John Burbank have been buying up farmland in the past two years. Famed investor Jim Rogers, a long-time commodity bull, thinks farmland values will continue to rise.
There are good reasons to believe that is the case, and some not so good. Let’s start with the good.
Crop prices are up. That’s being driven in part by the emerging markets. Corn is America’s number one crop. And nearly half of the corn we grow goes overseas to feed cattle and other animals. As China and the rest of Asia get wealthier they are going to eat more meat, and will therefore need more corn. What’s more ethanol has had a huge impact on the price of corn as well. A higher oil price makes ethanol a more attractive substitute.
Commodities prices have been falling recently. And fears that the US economy and the world economy could be slumping again have brought down the price of oil and other commodities. But demand for food is not going away. One sign is that corn after dropping sharply with the rest of the commodity market in early May has rebounded to near its yearly highs, up to about $7.50 a bushel. That’s up from about $4.00 a year ago.
Then there is farm technology. Seeds are better than they used to be, requiring less water. Most tractors these days are equipped with GPS, many of which will allow farmers to map out the most and least productive areas of their land so they can better distribute seeds and fertilizer. And when I was recently out in Nebraska I saw a number of farmers just starting to experiment with double row planting – staggering seeds so they could fit two rows in space that is not much wider than what they used to use for one. The result is that crop yields are way up, and rising. If farmland is more productive than it was a few years ago, it should be worth more.
All of this, though – the hedge funds getting in, the 20-year track record of positive returns, emerging market riches – smells a little bubbly. Remember housing, mortgage bonds and auction rate securities were also once thought of as can’t lose investments. That was until the global pool of money rushed in and inflated the housing market. That global pool of money never really went away. It just went into hibernation or maybe into oil and gold. And now it is surfacing in farmland. The concern is that this is a fear trade, which people are making to protect themselves from inflation or worse. Once the general economy rebounds, and fear abates, farmland could plummet. Remember, farmland was a great investment in the 1970s. Not so much in the 1980s or 1990s.
So is farmland overvalued now? Here’s the math: In Nebraska where I was, the farmland prices have reached about $6,000 an acre. Based on the current price of fertilizer and seeds, the farmers told me, it costs about $4 to grow a bushel of corn. That means at current prices, each bushel produces a profit of $3.50. Farmers these days get about 200 bushels per acre of corn. That means a $6,000 investment produces an annual income of about $650, which is an income yield of 10.5%. That’s more than double the earnings yield of the S&P 500. And it is three times the yield you would get with 10-year Treasury notes. So by that measure farmland doesn’t look overvalued.
That being said, it’s very hard to invest in farmland. There are no mutual funds that do it. Pension funds are getting into investing in farmland. So if you are one of the few people who have a pension, you may already be invested in agriculture in some small way. But even if you have no investment exposure to farmland, this all matters. The farm economy, while small relatively in the scheme of things, is playing a more important role in our economic growth. And as farm prices continue to go up that positive affect should remain, creating profits for farmers and jobs in Nebraska, Iowa and elsewhere. What’s more, the farm economy has rebounded much faster than the rest of the economy. The unemployment rate in Nebraska is about half that of the rest of the U.S. The reason in large part has to do with our weak dollar and exports. And that says something about where the U.S. economy is headed – I think in a positive way. We have the ability to make things here, even basic things and make money doing it and create jobs. That’s a bit of good news in an otherwise bad day.