Wednesday, June 8, 2011
Investing in farmland.................
Story here. Excerpts here:
"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%......."
"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."
"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....... 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."
"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."
Farm ground is selling in our part of the world. Ten years ago most of the farm buyers were developers hoping to plant roads and grow houses. Times change. Today most of the farm buyers are active farmers. Farm acreage with both a track record of good yields and road frontage has been selling in the $6,000 per acre neighborhood.
The 2011 growing season maybe a challenge for some investors in farm land. Between floods and a Spring in which it never stopped raining, we expect that a record number of fields in our part of the world will lay fallow this year.