Farmland Investment

[imoldernu]

Though I don't invest, am interested in the subject, and wonder why I haven't seen any recent discussions on investing in farmland.

It seems like one of the safest places for investment in the light of the predicted 30% increase in world population over the next 35 years, and the absolute necessity of food to feed that increase. Short term (10 year) prices of meat and grain have risen as much as 300%, and farmland prices have more than doubled in the same period, despite the genetic engineering that has taken place with both commodities... (which production is said to be leveling off).

Does anyone here have a good handle on this? Downsides?

[jetpack]

I think the biggest thing in farmland has been corn prices from corn ethanol. It's certainly a risk that ethanol subsidies will dry up and corn prices go down.

[HFWR]

I would want to know a lot about farming to make that kind of investment.

[wingfooted]

Quote:

Originally Posted by imoldernu Though I don't invest, am interested in the subject, and wonder why I haven't seen any recent discussions on investing in farmland. ?

I can only relate my own experience that it feels great to have a farm but as a strict investment vehicle - it leaves a lot to be desired.

Bought 160 acres irrigated land circa 2007 (admittedly near the market top) in Oregon. Great place, very scenic, fronts a major river, senior water rights. There was an old house on the land plus a 80 x 40 machine shed. The general idea was to eventually build a new house on the property and retire there. The farm land was rented out to a local farmer at a yield of about 2% of purchase price. Minus taxes and irrigation district fees, the net yield on purchase price is not much more than 1%.

Crops are alfalfa, wheat, corn, one year the renter tried pinto beans (a disaster). He runs about 60 pair of beef cattle as well, which is the big earner.

Of course, I was not content to just passively manage the property and have spent quite a sum on various pieces of equipment so I could play in the dirt, tools to fix the said pieces of equipment, vehicles to get to and from town to buy parts to fix the equipment, big sums in improvements, et al. A real money pit. I've come to the conclusion that instead of calling it farming they should call it fixing things as you absolutely have to be an amateur electrician, plumber, carpenter and mechanic.

If I wanted to sell (and I have absolutely no intentions to do so), I could get my purchase price back plus a small capital gain. Farms are illiquid investments and it might take two or three years to find a buyer.

I really don't have the skills to farm the place myself, if I decided to do so there would be another big outlay for farm equipment, tools to fix the farm equipment, ect. And 160 acres is too small to be commercial - to be commercial in this part of the country you would need to have at least one section (640 acres). Which is probably a couple of million bucks purchase price.

So, the take away is to have a farm for the pleasure of rural life, the satisfaction of having a big piece of dirt, for the enjoyment of hanging out in a pair of bib overalls with a John Deere cap and for the fantastic sunsets - but make your money somewhere else.




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[Options]

Don't invest in anything you don't completely understand. Unless you're a farmer, you don't completely understand farming. Farming is an occupation. "Investing" in farming is speculation.

Same with real estate. A friend who has money burning a hole in his pocket is just about convinced to invest $50K in some multi-family RE venture down in Texas as promoted by some hotshot "successful" (they're always successful, aren't they?) lawyer. I directed him to the BH site and told him to read it completely (along with as many book recommendations as he can stomach) before doing anything.

There's always somebody on the other side of every trade and transaction. I always assume they're more knowledgeable and better connected than I am.

[ajs56]

I have lived in a basically rural farmland area all my life. My parents farmed early in my life, my in-laws all their lives (dairy), and I know farmers large and small. We even own a 40 acre "farm" ourselves. About 30 acres tillable which we rent out to a local farmer, and the rest is buildings and woods. The farmland rent is about 1.5-2% of the land cost and covers property taxes basically. In our area of central Michigan, farm land prices have doubled or more in the past few years. BUT... this happens to be a local market phenomenon driven by a couple of individuals buying up a lot of farmland, causing a bit of a frenzy in the area. We bought ours as we wanted the room to roam, play in the dirt a little, cut a little firewood, enjoy the woods and trails we've made.

As an investment? I think as others have said it's like any other real estate - you are best to invest in what you know. Real estate is location. location, location, and that actually includes farm land in my experience. I didn't/don't necessarily view it as a money maker, but like our house it has value to us in that we use and enjoy it, and we hope/expect not to lose money over the long haul.

[FIREd]

My folks own quite a bit of farmland in Europe (mostly inherited from my grandparents who were farmers). The price of the land itself has increased more or less in line with inflation. But what makes this a very good investment has nothing to do with farming. It's the fact that the city next door is growing and that the land that was once farmed in now used to build houses. Prices jump about 50x when a piece of land is re-zoned from farmland to residential land. Farmers are cashing in, although some are fighting the re-zoning to avoid a big jump in property taxes.

[luckydude]

I own several large farms/ranches as a way to diversify my portfolio, not to make money out of farming, but for land banking. The properties are situated near one of the fastest growing metro areas in the south, and one of the properties is only about 10-15 miles away from the leading edge of the encroaching development.

At the present the properties are leased out to locals to grow wheat, corn or hay or to run cattle; I don't get my hands dirty or try to run it as a business because any additional income I might wring out of this simply isn't enough to justify the required effort. I have no loans on the properties, and with ag exemption in place, the property tax is miniscule. So net cash flow is positive---not significant, but enough for me to take a nice vacation or two each year. I don't need the properties to fund my retirement so I can just let the properties sit and (hopefully) appreciate; the plan is to pass them down to my heirs and let them reap the benefits down the road.

But over the years I've learned that there are additional ways to monetize this sort of investment aside from farming and land banking:

1. Government program such as CRP, which pays a landowner some money each year in exchange for letting the property sit fallow. I don't do this myself, but I've talked to several retirees who buy such properties and enroll them in CRP to generate retirement income. They then either hold on to the properties for this income or sell them at a premium to others. The downside is enrollment needs to be renewed every few years and the process can be somewhat onerous. Also, if you ever decide to put the property back into production, you'll need to spend some money to shape it up.

2. Mineral rights. A couple of the properties may be sitting on some gas/oil deposits that with fracking may become economically feasible to explore. Recently I was approached by a company to lease the rights; still in negotiation as I own some portions of the mineral rights, but it's a very complicated subject and I'm just getting up to speed on it. I'm not holding my breath on this but I certainly won't complain if they ever find a nice oil patch.

Lucky Dude

[heeyy_joe]

The only way I could be successful owning farmland is if I was paid not to try to grow anything.

[target2019]

I happened across farmland as an investment yesterday. Started out reading about timber and timber companies, and came across LAND. This is a very small REIT, and pays about a 2.5% dividend (not qualified).

LAND: Summary for Gladstone Land Corporation- Yahoo! Finance

Since this REIT opened in April, there have been stories about this type of investment. The dividend is currently $0.03 per month. You'd need 100 shares to pay for an ice cream cone.

[Avalon]

I expect to see farmland prices start to level out, if not drop some, at current grain prices. Last years bumper crop of corn and soy beans has sent prices to lows I haven't seen in several years. This year's expected yields will hold grain prices down for at least another year IMO. Possibly longer.

[imoldernu]

Interesting insights. Lots to consider.

Though I couldn't wouldn't participate, what brought the subject to mind is a farmer friend, who is now about 85, and has been farming here in Illinois since the 1940's. He began accumulating land for a few hundred dollars an acre, and now owns about 2000 acres. Since it's excellent land, my guess is $8,000 to $9,000/acre... and although a slight drop in the past year or so, the price has been steadily increasing over the long period. He has not actually farmed for about 10 years, but has a good lease income.

Perhaps the OP title was wrong, and rather than investment might have better said "farmland as a safe haven"... especially in looking long term... five to thirty years. I am reminded of the saying "they're not making more land."

Maybe not too great for an income stream, but if one is looking to the future, it seems that owning land could be hedge against a bear market, or advances in technology. At the very least, customers will always be there.

Some numbers here:

[Sand Pounder]

Quote:

Originally Posted by imoldernu Though I don't invest, am interested in the subject, and wonder why I haven't seen any recent discussions on investing in farmland. It seems like one of the safest places for investment in the light of the predicted 30% increase in world population over the next 35 years, and the absolute necessity of food to feed that increase. Short term (10 year) prices of meat and grain have risen as much as 300%, and farmland prices have more than doubled in the same period, despite the genetic engineering that has taken place with both commodities... (which production is said to be leveling off). Does anyone here have a good handle on this? Downsides?

That was pretty much my rationale 14 years ago when we bought some farmland. We wanted a way to balance out the stock options I had in my high-tech company, while getting a hedge against inflation. It has worked out reasonably well.

Since I spent a lot of time on the farm owned by relatives, I had some idea of how farms work. That background has come in handy when dealing with lessees.

Here are a few things I have learned:

1. There is a lot of abuse of eminent domain. We have been forced on three different occasions by court order to permit easements across our property. These easements have been to private concerns, not for roads, schools, etc. as eminent domain was intended.

2. In farm culture, reputation is everything. Once I figured that out, I have been particularly careful to follow through on all agreements. You really have to be honorable in order to do business effectively.

3. You have to be very careful with mineral leases.

4. It's hard to determine the exact value of the property because farmland varies in soil quality, grade (slope), and proximity to development.

5. Unlike rental housing, you won't get a phone call at 3AM because the toilet is plugged.

6. We haven't been able to make a lot on rent. We get about 0.5% of the property's value in rent minus expenses. We've been offered more from other potential renters, but the current renter takes really good care of the land.

At this point, the value of our farm has probably gone up maybe 50% in 14 years. That's about a 3% average return. The value has gone down quite a bit the last couple years because corn prices have been cut in half.

All in all, not a great investment for us, but not that bad either considering where interest rates are today.

[FIREd]

Quote:

Originally Posted by imoldernu Perhaps the OP title was wrong, and rather than investment might have better said "farmland as a safe haven"... especially in looking long term... five to thirty years. I am reminded of the saying "they're not making more land."

My grandparents certainly thought along those lines.

But they were knowledgeable about the local farmland. And they had local connections to get good deals on the purchases. In their rural community, news of a piece of land being up for sale travelled only by word of mouth. Outsiders had virtually no chance to get in on a good deal. It's still the case today. And they lived close enough to the land to work it or at the very least maintain it.

[haha]

Quote:

Originally Posted by target2019 I happened across farmland as an investment yesterday. Started out reading about timber and timber companies, and came across LAND. This is a very small REIT, and pays about a 2.5% dividend (not qualified). LAND: Summary for Gladstone Land Corporation- Yahoo! Finance Since this REIT opened in April, there have been stories about this type of investment. The dividend is currently $0.03 per month. You'd need 100 shares to pay for an ice cream cone.

If you are interested in this sort of thing, the best and largest timber grower in the US is Weyerhaeuser, which became a REIT several years ago. I have owned WY, as well as POPE since the crash. WY also has a large wood products business which of course is closely tied to housing starts, especially SFH. I made meaningful money on POPE, which is an MLP and thus has some drawbacks that WY does not have.

A welcome oddity is that a timber cut produces capital gains, no matter how long you have owned the REIT. So although the dividends are not qualified, they have all been long term capital gains in the years I have owned WY.

I have never failed to make good money on various publically traded timber oriented companies. There are not many of them left.

I would not even consider some little known timber REIT unless you are qualified to judge the tree species it produces, its marketing channels, its silviculture, its age assortment, the productivity of its tree farms, etc.

IMO, none of these companies is exactly cheap now.

Ha

[target2019]

Thanks, haha. The valuations are too high at this time, as you say, for timber companies.

I think this highlights use of land as a consideration. Farmland is seasonal, while timber is a slow-growing affair. In both cases, the economy and commodity prices affect the investment.

This is article from 2008 was interesting. It may get the farmland investors thinking of other aspects of land.

How to invest in timber

[racy]

I guess technically I "own" farmland via the Deeds of Trust we have. They're yielding 3.5% and make up part of our fixed income portfolio.

[canuck5]

Estimated costs for "Illinois" corn, this year, is around $569/acre, not including any land costs, mortgages or rent. Average expected yield is 187 bushels/acre, so the cost to grow corn there is $3.04/bushel. Average rent there is $264/acre or $1.41/bushel (assuming 187 bpa). If you had to have a mortgage, that number would be higher.

Today's corn price is $3.69/bushel (minus whatever the basis is for the area), so if you don't own or rent, you can (on average) make ($3.69 - $3.04 x 187) $121.55/acre. If you have to rent, you will loose $142.12/acre ... if you're paying a mortgage, you'll loose a lot more.

When corn prices were nearing $8/bushel a couple of years ago, "the world" added an additional 1 million acres of farmland, some of which came out of CRP, some of which came out of the Amazon and a lot in Europe. Seed companies are breeding new types of crops, so that they can be grown in colder climates (more in Canada). In addition to that, those same seeds will be able to be double cropped in southern climates (2 crops/year in South America for corn where right now they will do corn, then soybeans).

A lot of farm subsidies are being changed, altered and or taken away.

South America produces corn and soybeans, cheaper than we can right now, but their biggest problem is transportation, getting it from farm, to the rest of the world, but that is changing quickly. Not sure what all this means, but sure is food for thought before making a big investment.

[Avalon]

Some additional data from an Iowa farm. Dry land (non-irrigated)

50/50 crop share agreement. Planted half in corn, half in soybeans. Fields rotated yearly to help combat disease and insects.
Corn APH 170
Soybean APH 50

I cannot estimate 2014 costs accurately yet.

I've done a 5 years average looking at my past records. This includes some lean years (drought), and good years. Corn prices ranging from mid $3's to mid $6's.

5 year average cost per acre (excluding land costs) - $170. Includes both corn and soybeans. Average net per acre - $340

My largest expense is seed. We plant a corn population of 32,500/per acre. Soybeans at 155,000/acre.

Current corn cash offer locally is $3.26 This reflects a basis of -0.36 from CBOT.

I prefer to look at the November bids and basis.
Nov bid is $3.19 with -0.52 basis.

Current cash soybeans offer is $12.06 with a positive basis of + 1.30
However, looking at the Nov bid, basis has gone to -0.72 for a price of $10.04

Western Iowa Cooperative

[athena53]

A group in our area has been advertising seminars on investing in farmland in the Sunday real estate section.

They're pictured with their helicopter. That's all I need to know.