Farm Income vs. Bond Income

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Farm Income vs. Bond Income

Postby john » Wed May 22, 2013 10:43 am

I recently had this question asked of me and wasn't sure what the right answer is:

A 68 year old person with a 66 year old wife, they have a good tolerance for risk and significant accrual of assets. Of which about 30% includes a large investment in quality midwest farmland that has produced steadily rising income.

His question/statement was that he believes his farm income can be a significant surrogate for the bond income portion of an asset allocation plan, allowing him to be much more aggressive in his equity/bond asset allocation (90/10, maybe even 100/0) than might otherwise be recommended for his age. Is this a rational approach? What are the pitfalls here? He is a buy and hold, long-term diversified investor.

Additionally, he continues to work-part time and can do so as long as his health holds up, he has no significant debt. Any thought on this issue would be greatly appreciated.
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Re: Farm Income vs. Bond Income

Postby Riprap » Wed May 22, 2013 11:40 am

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Last edited by Riprap on Wed May 22, 2013 6:23 pm, edited 1 time in total.
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Re: Farm Income vs. Bond Income

Postby Elbowman » Wed May 22, 2013 11:57 am

I don't know much about investing in farms, but I imagine it's not something you frequently buy and sell (to be used for rebalancing)? If thats the case, I would agree with Riprap. Going below 20% bonds adds a lot of variance for a relatively small amount of return.
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Re: Farm Income vs. Bond Income

Postby linguini » Wed May 22, 2013 12:13 pm

It gives steady income, but it's not exactly a low-risk investment. We're basically talking about owning land that is geograhically compact and is only usable in an industry that fluctuates yearly based on unpredictable weather. It might be a great investment in terms of income, but it lacks the stability of, say, US treasuries. How is farmland significantly different than illiquid reits?
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Re: Farm Income vs. Bond Income

Postby ogd » Wed May 22, 2013 12:14 pm

The problem with farm income is that it's subject to fluctuating food prices. They could drop because of deflation (which is correlated with stocks, not good), or randomly because of a very good farming year in Ukraine or something, or permanently because of some once in a lifetime advancement in food production. Many professional farmers hedge away the food prices, passing the risk onto Wall Street.

It's not a bad investment by any means, but I would consider it less reliable than bonds, and for an older couple I'd bump up the bond allocation accordingly.
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Re: Farm Income vs. Bond Income

Postby IlliniDave » Wed May 22, 2013 12:53 pm

I wasn't entirely clear, but does he just own farm land that he rents to farmers, or does he own actual farms that are operated as stand alone businesses of which he shares in the profits?

The latter would probably be subject to a lot of fluctuation that I would personally consider more stock-like. If he's simply renting acreage for an annual fee independent of what profit the tenant makes, that is more bond-like. My family has done that on a small scale across a couple generations now, and it has produced a steady income stream.

Either way, it's real estate, either essentially a rental property or tied up in a business venture, and I'm not sure if it's a good surrogate for stocks or bonds, yet it has value in it's own right for diversification and income as part of an overall financial strategy.

Since I'll likely have to weigh some of the same questions someday, I'd be interested to hear the more experienced answers. My instinct says balance stocks and bonds independent of the land. His asset total probably factors in too. Interesting question.
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Re: Farm Income vs. Bond Income

Postby Scooter57 » Wed May 22, 2013 3:05 pm

If hr had sudden, very large unanticipated expenses at a time when stock prices were way down, could he cover them without having to sell the stock at a loss?
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Re: Farm Income vs. Bond Income

Postby SGM » Wed May 22, 2013 3:25 pm

Farm rental income is steady and increasing somewhat over the last 15 years in our area, maybe because of the demand for ethanol. I would not include it in determining our equity/bond asset allocation. I would treat it as a separate income stream. I like diversity of income streams and there is room for the land to be a hedge against inflation. However, it has some risk of losing value and being very difficult to sell. When construction is booming everyone wants to buy your farmland. Renting the farm land is less risky than actually farming it and consequently the return is not expected to be as high.
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Re: Farm Income vs. Bond Income

Postby ResearchMed » Wed May 22, 2013 3:50 pm

Scooter57 wrote:If hr had sudden, very large unanticipated expenses at a time when stock prices were way down, could he cover them without having to sell the stock at a loss?


Scooter57's comment is probably among the most important considerations.

If all other assets were equities, any sudden need for cash, and they might be forced to "sell low".
(In the old days, they might have had a low-rate line of credit available, given the seasonal costs of farming. If that ever existed, it might have changed as all lending changed a few years ago.)

One purpose of bond/cash/other fixed income assets is that they can be used for unexpected (or expected) expenses, without worrying about whether one would need to sell equities during a "down" market.

This is another reason to keep some of the "fixed income" in good old cash. It's available immediately, without a loss.
This obviously doesn't apply to assets held in a 401k/403b that can't be accessed until separation, etc.
(Yes, there is the slow loss to inflation, but with current interest rates, and for a modest amount, that's not a huge concern given the security of "just in case".)

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Re: Farm Income vs. Bond Income

Postby KyleAAA » Wed May 22, 2013 4:13 pm

I own farm land and I don't count it as part of my asset allocation at all. Farm land DOES go down in value at times (mine did) so I definitely wouldn't count it as a bond replacement. It's just a business venture involving real estate.
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Re: Farm Income vs. Bond Income

Postby dbr » Wed May 22, 2013 7:09 pm

john wrote:
His question/statement was that he believes his farm income can be a significant surrogate for the bond income portion of an asset allocation plan, allowing him to be much more aggressive in his equity/bond asset allocation (90/10, maybe even 100/0) than might otherwise be recommended for his age. Is this a rational approach? What are the pitfalls here? He is a buy and hold, long-term diversified investor.


Farm income might allow a person to be comfortable with more risk in stocks but the reason is certainly not because farm land is a surrogate for bonds. I think this point has been made in a couple of posts above. Also aggressive to the point of 100% stocks with one's stock and bond investments doesn't follow. It seems unlikely a couple in their sixties would want to own a farm and then only stocks without any liquid assets that are not risky.
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Re: Farm Income vs. Bond Income

Postby 64415 » Wed May 22, 2013 11:35 pm

If their annual expenses could be met in a scenario where the farm income goes down by half and the dividends from a passive diversified all equity portfolio goes down by 50% during a 50-70 % bear market, then I think there is nothing wrong with an all equity portfolio. If they can pass that scenario than they have the ability to take that risk. Most farmers are hardwired to endure volatile markets without panic selling. I would still, however, have 1-2 years of annual expenses in cash.

My grandparents farmed and had a sizable 100% equity portfolio until the very end. They had very modest expenses that were met by their farm rental income during retirement, and the dividends from the equities were just reinvested in more equities. They had the ability to take the risk and they chose to. It turned out well for them with the bull market of the 80's and 90's, but it wouldnt have made a difference in their ability to stay retired if a bear market had occured during the same timeframe.
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