Bogleheads

[64415]

I'm curious how many Bogleheads have farmland as an alternative investment. I have about 60% of my investable assets in non irrigated midwestern farmland and have come to appreciate what a great asset class it is. The merits as I see them are as follows:

1.A hedge against a weak dollar/inflation. I place these two together because I feel the inflation that will be talked about by the media will really be a function of dollar depreciation. Since grains are priced on the world markets in dollars you get protection against a depreciating dollar. If not for my farmland, I would put my liquid portfolio in a 50:50 US:international mix to protect against US currency risk. As it is I feel comfortable with a 65:35 mix.

2. Low correlation with US equities. I don't have data, I am just basing this on first hand experience with land values over the last decade. There was a "flight to safety" here in the midwest during this financial meltdown with farmland prices in my area only down 3-4 % while still throwing off 7-10% returns on a mortgage free farm.

3. The opportunity to participate in an inefficient market. Many areas of the agricultural land market are poorly marketed. I've seen farms with returns of 10%(assuming a cash investment and renting to a AAA rated corporate ag giant) marketed so poorly that no competing offers are on the table.

4. The best way to profit from the pending fresh water crisis. Tillable acreage in the US will drop dramatically as currently farmed land that relies on the Ogalla aquifier is forced out of production.

5.You deal with professionals as tenents. The modern successful farmer is a hypercompetitive, professional man/woman of integrity. Compare this to the tenents you get in multifamily housing.

Many other positives could be listed. I will stop at this point. I look forward to your comments and experiences.

[KyleAAA]

I own 150 acres of land in south Georgia (75 of it farmland, 75 timber land) that I inherited. I don't really think of it as an investment, but you'd be surprised how much 75 acres of timber is worth.

Don't make much at all off the farming portion. Do you do a straight lease or do you sharecrop? I think I'd be hard-pressed to get a 7-10% return out of the farm portion, but the value of the timber more than makes up for it.

[stratton]

How does someone invest in farmland without owning a farm?

Any kind of private investment is going to have outrageous fees and any farming companies such as Maui Land and Pineapple (MLP) are really food production companies. There are real estate companies such as St Joe that own some 600K acres of Florida land or other companies owning water rights.

Paul

[64415]

Hi Kyle AAA,

I have 300 tillable acres "custom farmed". That refers to hiring the labor and machinary of farmers to perform the various services: planting, spraying, combining the corn and soybeans. This is active management on my part. The net returns on these acres are the highest and were roughly 10% last year(based on the current value of the land, using the value of what I actually paid for the land I get 16%).

The other 220 tillable acres are rented out on a "cash rent" contract to a AAA corporate client. Based on the current market value of this land I get a 7% return. The returns based on what I actually paid are higher, for 138 of these acres the return is actually 20%.

[speedbump101]

We own a quarter section of farm land (160 acres)... We cash rent it, and net of taxes it returns 3.6% using today’s land value / cash rent...

Caveats:

We have owned it for almost 15 yrs, and its value has appreciated about 50% to 60%, more importantly though, we cash rent it to family... This is definitely not the optimum way to maximize returns .

We could do better rent wise, however this could lead to a divorce, in which I’d certainly do worse.

SB...
_________________
“Knowledge is often mistaken for intelligence. This is like mistaking a cup of milk for a cow."- Bradford K Hull

[MWCA]

Timber isn't worth that much at the moment. Watch all those logging shows so Im a tv expert

[TreeGuy]

[64415]

Hi Stratton,

The water play I was referring to was a dramatic decline in tillable acreage due to currently irrigated farmland being taken out of production due to declines in aquifier levels. A drop in acres tilled will drive up the price of grains assuming normal growth in yields per acre due to agriscience innovation.

You are correct, I would not buy farmland via a MLP or other entity. Direct ownership is the only way to go. If you don't have the time to learn the issues involved with managing your own ground, you can hire a farm manager. I don't know their average fees.

[alvinsch]

[twacapt]

I own 500 acres of farmland in southern Missouri, all tillable, but only half of which is irrigated. I rent it out to a local farmer for a 1/3 share of the crop. I pay 1/3 of all fertilizer and pesticide bills, and get 1/3 of crop sales. Taxes are not much at all, being taxed as ag land. Over the past 10 years, it has returned anywhere from 7% to 11%, and that was with average commodity prices. As commodity prices increase, as was the case last year, the return is more.

I find it an excellent investment. I wish I had more acreage, but it is hard to buy since most farmers very seldom sell. The price of farmland per acre doesn't appreciate dramatically each year (again, prices are based on commodity prices and what a farmer can expect to earn) but it is a steady income producer and gives the owner a lot of pride in ownership.

As Will Rogers once said about land, "they ain't making any more of it."

[stratton]

[chicagobear]

Cresud (symbol CRESY) owns lots of farmland and cows in Argentina.

[WileECoyote]

I was going to add Cresud too but got beat to the punch!

alvinsch, did you say there are timber mlps?? I have Plum Creek as a timber play. They seem to be diversified and seem to be well respected due to their recent deal with the Campbell Group.

[alvinsch]

[WileECoyote]

Very interesting links, thanks! Pope, Deltic and some of the others were too volatile for me!

Another one that I didn't see that I had looked at as well was TimberWest in Canada.

[stratton]

Pope is a microcap with about $100 million market cap.

Paul

[neverknow]

Quoted comment from the January 2009 National Stock Show in Denver, from a young couple beginning in ranching (on generational land);

[DaleMaley]

I don't own any farmland, but my father and brother do. I have watched Central Illinois farm land prices since the 1970's. My impression has been that over the long haul, farm land prices keep even with inflation....about the same as houses in most normal housing markets.



It is hard to pick off the exact values on this graph...but if we assume:

1970 = $500/acre
2009 = $4500/acre

CAGR over last 39 years is 5.8% for Illinois farmland.

Inflation over this period was 4.59% CAGR, so farmland has done a smidgen better than inflation.

I use the Rowe Price New Era fund (PRNEX) and TIPS as my inflation hedges. New Era has a CAGR of 8.95% since its inception in 1969....which is similar to the 1970 start of the farmland price data.
_________________
Dale
____________________
Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees. – Warren Buffett

[Ariel]

[DaleMaley]

[64415]

Hi Speedbump101,

I feel your pain. One of our farms was cash rented to a cousin for $120 per acre. He complained about the high rent charge every year. That same farm is now rented to an agribusiness for almost $300 per acre. The final straw was when we heard through the grapevine that this cousin was bragging about the great yields and large profit he was generating from this particular peice of ground. Good luck.

[64415]

To Dale Maley,

The Illinois farm ground market is the most efficiently priced market in the US. I would never consider buying farmland there. It has tremendous CSR(corn suitability rating) scores and great productivity with ample rainfall(absolutely no need for irrigation), but you will pay dearly for it. I saw it referred to in a recent Forbes article on investing in farmland as "the Prada and Gucci of farmland". Desolate, sparsely populated areas of the Midwest with similar CSR scores can be had for 20-35% less quite easily.

[KyleAAA]

[KyleAAA]

[MP173]

My dad purchased a 50 acre farm in Southern Illinois in the 50's, to supplement his business and give him something to play with. He did quite well, 30 acres tillable and 20 wooded. He grew Christmas trees on the wooded section. Oil in the 1960's was the wild card (and still is, along with possible natural gas in the future).

I now own it and have never considered selling. I receive 1/3 of the crop revenue and have used the same farmer for years. The oil royalties are my hedge against higher gasoline prices and were quite lucrative last year.

I would not be buying farm land at the current levels ($4-5K/acre in the area). Nor would I sell at those prices either, probably more out of sentimentality. However, in case things really hit the fan, it is nice to know there is a piece of land that I call my own.

ed

[alvinsch]

[speedbump101]

[WileECoyote]

I forgot about this one as well. Seeing this post got me thinking about old timber\land investments I was looking at. Another one to consider is Limoneira (LMNR). Very direct play on agribusiness in California.

[stratton]

Roger Nusbaum has an article from a year ago on foreign farming companies with about 20 listed from NZ, Sweden, Indonesia, Thailand, Australia, Maylaysia and Brazil.

Looks like there is plenty of stocks if someone wants to make their own portfolio. At least one of Roger's stocks mentioned above is bankrupt as of now. I doubt anyone could make an etf from these because they are too small or have to small a daily turnover so wouldn't be scalable. Filling an etf full of large food producers isn't the same thing and has similar problems like CUT and WOOD not being timberland plays, but pulp and paper.

Paul

[johnjtaylorus]

My best investment was land bought 30 yrs ago within a one-hour drive of a city.

[gchan]

[grumel]

[KyleAAA]

[gchan]

Jim Rogers is definitely against subsidies.

[tadamsmar]

[gw]

Not to hijack the thread, but out of curiosity, what would the typical midwestern corn/soybean farmer get in total subsidies?

[grumel]

[gchan]

I think he believes that the fundamentals for farmland is good even if the sky isn't 'falling'.

He believes that we'll see very high inflation due to the US government printing money. But suppose that doesn't happen. The supply/demand fundamentals will still push prices for agricultural products higher.

That's his prediction of the future anyways. He's probably been wrong about some things (e.g. he predicted that lead production wouldn't increase... but it went up about 50% since he published his book on commodities; but it worked out reasonably well anyways, since the price of lead has gone up since his book).

[alvinsch]

FYI: This farmland thread got mentioned over on SeekingAlpha.

http://seekingalpha.com/articl....g-heats-up

[DeepInvestor]

There is a good article about investing in farmland at the blog Farmland Forecast.

[gw]

[mephistophles]

mephistophles



Joined: 27 Mar 2007
Posts: 1262

Posted: Fri Apr 06, 2007 5:08 pm Post subject: Hellos NOSFERATU

--------------------------------------------------------------------------------

Your land is not only part of your "net worth," it is also part of your total worth as a being traveling on this planet we call earth. From the dawn of time, for all living creatures, the land has been our mother, our father, our sustainer, that from which we arose and that to which we will return. Land can provide us with food, water, shelter, clothing, a place to mate and a place to call home. It can satisfy our physical needs, our emotional needs and provide a spiritual connection to all that is.

Put more concretely, Nosferatu, you can build and live on your land, grow crops and raise animals there and have the space to provide for those of your clan.

The land you own has far more value than any bank account, 401 K, mutual fund or electronic entry next to your name.

They say that value lies in the eye of the beholder, but in the case of land the value will be there long after the beholder is gone.

Respectfully,

ole meph

[drjdpowell]

[Slim5819]

[stratton]

Not downloadable. It appeared in:

[graveday]

Don't know about Jim Rogers, but Will Rogers said, "Buy land, they ain't makin' no more of it." I'll bet everyone has heard this, but I wish I had done this thirty years ago. Problem is I could never decide where to do it.

[gw]

[64415]

To Drjdpowell,

In response to your question, "why doesn't the AAA agricultural company just buy the land itself", I have always assumed this particular company avoided buying land in our area so as not to alienate their ultimate customer, the farmers who buy their chemicals and seeds. I posed this question this morning to an acquaintance who works for this company in a blue collar capacity and that was his impression also. The person who represents this company in the lease negotiations we have with them has also told us that they are concerned with being perceived as driving up the cost to rent farmground in the area, so they will never compete with another farmer for the right to rent a given piece of ground. It is an inefficient market in the sense that, you as a landowner or potential landowner have to know that this company exists as a potential tenant. They will not advertise their presence in the market. Their impact on the rental market is strictly a local one, not a statewide effect, they are not going to be interested in renting ground that is geographically removed from their base of operations.

[Slim5819]

[
Thanks! I guess that's about 0.5% yield from subsidies alone if the land is $4500/acre. Not bad, but obviously not a huge part of the value of the land. But maybe the real value of the subsidies is as insurance.[/quote]

Insurance was the original purpose of the subsidies to cover the farmer's cost of production when prices were very low. My expense/income reports are archived prior to 2005, but in 2005 I received about $70.00 an acre in government payments. Beginning in 2006 we've had much better crop prices and farmers haven't needed the subsidies.
There are two parts to the subsidies. One are direct payments which farmers have been getting regardless of crop prices and then there are counter-cyclical payments which kick in when crops drop below a certain level. Since 2005 most farmers haven't gotten the counter-cyclical payments and I don't think they should have. I, for one, could probably also manage without the direct payments. It would be different, though, if I didn't own the land free and clear so I don't want to speak for other farm owners/investors.
The government does also subsidize to some extent the premiums for actual crop insurance to cover damage from hail or loss of yield or outright crop failure from drought or other causes. Cost of that insurance for me this year is about $11.00 an acre. Sorry, I can't tell you what the premium would be without the government subsidy. That money, plus whatever the subsidy is, goes to a commercial insurance company. In 20 years I've had several claims for hail damage so most farmers take out crop/hail insurance.
Hope this helps provide some insight for the non-farmer/investors here.

[gw]