“I am convinced that farmland is going to be one of the best investments of our time” - Jim Rodgers
Investing in agriculture today will be like investing in oil in 2001 to 2002 ” - Marc Faber
As mentioned in our previous post on hedge fund returns, the poor performance of investment vehicles focused on public securities has led many investors to consider private investment alternatives. One of those alternatives that has become increasingly popular is farmland. In this post we will take a brief look at investing in farmland, including expected and historical returns and share some initial conclusions.
Source: fishhawk
According to the USDA, the total value of all farmland and buildings in the United States amounted to $1.9 trillion at year-end 2010. This compares to $5.3 trillion for U.S. commercial real estate and approximately $15 trillion for U.S. publicly traded equities. Furthermore, with that $1.9 trillion in valued divided into approximately 2 million farms in the U.S., farmland is clearly a fragmented business and a niche investment class. With an average farm value of approximately $1 million, it is mostly an investment for high-net worth individuals and small institutions.
Generally, the primary approach with investing in farmland is to buy land and lease it to an experienced farmer. The rental rate is determined by the productivity of the land and agricultural prices. The typical rental rate is set at a level that divides the income generated by the farm in the 50%-50% range. This allows for a reasonable return to the land owner and fair compensation with upside to the farmer for his labor and taking the risk of operations. The typical rental deal is for a one-year term.
As shown below, rent to value ratios (i.e. rental yield) have trended lower over the past 10 years and are fairly low. At 2008, the national average was in the low 3% range, as were yields in the key corn belt region. Current yields (as of 2011) are at commensurate levels, so yields have generally stabilized in recent years.
The low initial yield on farmland is nevertheless attractive because the yield (and land prices) will grow with agricultural prices. As such, it is an excellent hedge for inflation. As investors have become more concerned about currency debasement and future inflation, getting a reasonable going-in yield plus growth with inflation (plus investing outside of public markets) has become very attractive to investors. With agricultural prices soaring in recent years, farmland values have followed, as shown on the chart below.
Thus, the combination of rising agricultural prices and rising land values have translated into strong returns for farmland investors. Below is a chart of theNCREIF Total Return Index, which tracks returns on institutional quality farmland. The returns include both yield and capital gain. Since inception of the index in 1992, farmland has generated a compound annual return of 11.0%.
So is it too late to invest in farmland? Certainly it has generated very strong returns over the past 20 years and the extreme demand that particularly high quality land is getting from investors currently may be indicative of an emerging bubble. However, over the long-term, agricultural prices are likely to continue rising due not only to a weaker currency but also due to exponential global population growth, and that will continue to benefit farmland returns. While we will discuss many of these issues in future posts, our initial conclusion is that it makes sense on many different levels to invest in farmland, even today, but with caution.
7 comments:
Very interesting Brian. Definitely an opportunity there. Are there any vehicles out there for those who want to dip their toes in but don't want to get their whole foot wet?
there aren't any direct vehicles that I'm aware of, other than a handful of small investment funds dedicated to the sector. It is by far the most inefficient asset class I've been involved with, so if someone can find a way to make it more efficient and accessible to investors, he can create a lot of value.
I am not at all in agreement. Your wealth needs to now be very mobile. I know people say water, food etc etc. History has shown that when people are driven you will get looting, shooting etc etc just to feed yourself.
I also live in Africa and furtile land is a constant issue with governments and the resource of peoples. If any of you are subscribing to mine nationalizations so will furtile land, if not first.
Now with the carbon tax starting in Australia - you will be taxed on cows etc - methane!!!!
Next is listen to the latest Lindsay Williams radio interview. If you into him or not - the question is does he think of all this himself.
Listen to the part where he describes the taxes on farms to increase and property. This is how they will own everything.
So thank you very much I would rather have Gold - I can move with it and no one knows I have it and how much!!!
http://sgtreport.com/2011/10/lindsey-williams-on-goldseek-radio/
Then only a little piece that looks like nothing but you can live of it. But big fertile tracks of land - noway. All over Africa this has always been a contenscious thing and if foreign people - European, American, Australian or Asian think that they can pump in all this money into land but you will be very disappointed in the end....
I think what Brian has in mind is buying in politically stable countries through an investment vehicle rather than direct ownership.
As you are from Africa you have seen it up close and personal what happens when the crooks start running out of options and have to placate a mob. The USA is not there (yet) and hopefully never will be.
I keep my Gold close at hand myself but I remind myself constantly that I am in the minority who think Gold is the way to go. At some point I hope Gold will be the wrong vehicle which will mean the world is no longer run by crooks or at least is run by sane crooks who realize it's not in their interest to starve all their serfs to death.
If you would oblige us we would like to get your perspective and any wisdom you have to impart. When you realized that farms were going to be taken. Are we talking about Rhodesia, South Africa or elsewhere. (I said Rhodesia deliberately in case someone feels obliged to correct me).
I understand if you don't want to.
I'd also add that in the United States, landowners have tremendous political power. Probably second only to banks in political influence at the national level and they have complete control of local governments. So sure, nationalization or increased taxation is a risk, but a low one in my view.
I did write a long reply but unfortunately its got lost. One of things I mentioned was that you needed to protect your land because of the following and this seems isn't unique to Africa...
http://sgtreport.com/2011/10/growing-trend-thieves-raid-vegetable-gardens-in-indianapolis-new-york-and-chicago/
I will try to write again.
Yes landowners still have power but if this 99% escalates it will be meaningless. We underestimate the systemic change that is going on. Once in a while in history there are cyclical resets and we have to accept that this is one of them.
Just to add quickly...
This is a time in history much like the 1960 activism and the Luther King movement etc. This is about the principle of ownership, fences, borders, global vs local, bigness, diversity. The systemic structure is weakened by these. Questions like who's resource is what's n the ground and what you can grow on it. The power has gone too far and it is precisely that which will be reset hence the attraction to Gold and Silver - as this will be your wealth which is borderless and mobile.
I have experienced it too often in Africa where the rules then change to suit the circumstance. And you will be surprised about politically stable countries. By the way I am of the opinion that Africa will be politically more stable then the western developed political nations!!!!
I have for instance grown up in Namibia. Vast land with only 2million people. Now there individuals still have influence.
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