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As the value of gold climbs daily, one might think they should have invested in gold and they would be wealthy on paper today. The same could be said about gasoline futures, commodities, farmland, and many other potential investments. But investments in agriculture come with extensive expertise if you are living and working in it every day. Many farmers have made quite a bit of wealth with high commodity prices, but have they used it to buy machinery, pay down debt, or buy farmland. Could they have gained more wealth with wise investments in the equity market? You have already learned that agricultural stocks have done better than the S&P 500, but what about land prices?
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The April 14th edition of Farmgateblog.com explored the performance of agricultural stocks and how they compared to the Standard and Poor’s Index of 500 stocks. And many of the big name stocks in agriculture were top performers in comparison. If you are not an investor in the stock market, but have invested in farmland, how have you done in comparison to the Standard and Poor’s 500 Index? Iowa State University economist Mike Duffy compares the values after looking at the turbulence in the stock market.
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Duffy says the S&P value grew over 300% from 1990 to December 2010, despite the disastrous performance in 2008. But to compare the investments on equal terms, Duffy compared a $1,000 in Iowa farmland in 1960 to a similar investment in the S&P. Both may have a rise and fall in the value of the initial investment, and both will have an annual return on investment, such as stock dividends and farmland rents, minus any costs. All returns on investments were used to purchase more farmland or stocks. The land investment began with $1,000 purchasing 3.83 acres and 17.6 shares of the S&P. Since 1960 the yearly percentage change in land values ranged from a -30.1% to a +31.7%. The S&P investment ranged from a -40.7% to a +35%.
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At the end of 2010 the investor would have had 33.57 acres of farmland work $170,012 or 76.73 share of S&P worth $95,265, which is 56% of the land investment. Duffy says if the investment had been made in 1970, the land investment would have been worth $69,173, and the stock value would have been worth $44,366 or 64% of the land investment. If the investment would have been made in 1980, the farmland investment today would be worth $9,839, and the stock investment would be worth $19,739. He says the answer to the question of which is a better investment is complicated and depends on when the initial investment is made.
The economist said the majority of farmland is purchased by existing farmers, whose decisions may not fit with traditional investment theory; but in spite of that, “land, over the long run, has produced competitive, if not superior, returns compared to the stock market.” Does that give any indication of what will happen in the future? Duffy says there are several factors that should be considered:
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1) The value of land is determined by its income earning potential, which means commodity prices and the economic dynamics that affect them.
2) Another uncertainty in the land market is the changing landowner demographics, and how land will be transferred from one generation to the next is not entirely clear at this time.
3) The performance of the stock market for the next few years is also not clear, since it will depend on the performance of the US economy.
4) The imbalance of trade is another area of uncertainty with respect to possible impacts on the U.S. economy and the performance of the stock market and the land market.
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Duffy said land and stocks are different types of investments and assets, and there are many stocks that perform better than the S&P 500, which was indicated in the University of Illinois study cited earlier. What the future may bring is difficult to predict.
Summary:
Many potential investment possibilities have increased in value over time, including both farmland and stock indexes. However in comparing which is a better investment over time, the date of the initial investment should be considered. Looking at the rise in value of farmland and the S&P 500 Index, farmland outperformed the stock index if the initial investment was made either in 1960 or 1970, but the stock index would have been a better investment if the initial investment had waited until 1980
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Source: Growing Georgia