Ag-Rural Land Remains A Sound Investment

11/12/2008 7:47:00 AM

Ag-Rural Land Remains A Sound Investment

The recent economic turbulence that has placed the Dow Jones Industrial average and global financial markets in turmoil has investors understandably skittish. With the value of their stock portfolios declining, Americans with discretionary cash are looking for alternatives.

Often overlooked is agricultural land. With one exception — that being the farm crisis of the early 1980s — rural land values have increased steadily since the 1950s. According to the U.S. Department of Agriculture, rural land values rose 13.5 percent nationwide during the previous decade alone, while dollars invested in the S&P 500 produced no gain after accounting for inflation (E.S. Browning, “Stocks Tarnished by Lost Decade,” Wall Street Journal, March 26, 2008).

“Most investors turn to the stock market because that’s what they understand and it’s easy,” says Lee Vermeer, vice president of real estate operations for Farmers National Company, based in Omaha, Neb. “Stocks are easy to buy, sell and follow. Aside from farmers who have typically comprised the largest percentage of rural land purchasers for obvious reasons, investing in rural land hasn’t been viewed as all that glamorous in the past. Over time this investment has had a stable and steady appreciation. I’ll take stable over glamorous and vulnerable any day.”

Shift in investor demographics

Farmers National has seen the demographic profile of rural land investors’ shift in recent years, a trend documented in a land value survey conducted every year since 1989 by Iowa State University (ISU). In 1990 and 1991, farmers represented more than 80 percent of rural land purchasers compared to 56 percent in 2004. Similarly, the proportion of purchasers classified as “non-producer” investors by respondents to the ISU land survey has risen considerably over the past several years. Non-farmer investors represented only 12 percent of purchasers in 1989; climbing to an impressive 34 percent in 2007. Many of the investors over the past few years have been motivated for a variety of nonagricultural uses including summer homes, hunting camps and other recreational venues.

Jim Farrell, president and CEO of Farmers National Company, the largest rural land management company in the nation, confirms the shift. “Our real estate division just finished the 2008 fiscal year recording the highest number of rural land acres ever sold,” Farrell says. “While the sales record is nice and speaks well of our marketing efforts, we are more encouraged by the increasing diversity of the rural land investor profile. More investors are realizing that rural land is a solid investment. With the influx of speculation and uncertainty related to the stock market, we expect this trend to continue.”

For nearly 80 years, the real estate division of Farmers National Company has helped individual landowners, partnerships, corporations, trusts, and non-profit organizations sell, acquire, and trade a wide range of agricultural property including farms, ranches, recreational lands, country homes, agribusinesses, and one-of-a-kind country properties. The company recently ended its 2008 fiscal year on a record note with nearly $390 million in rural real estate sales from 736 transactions.

Farmers National also specializes in auction services; a selling method that Farrell says is gaining popularity among their clients. “We held 220 auctions in the past 12 months and consider auction services as a key offering for our clients,” Farrell says. “Sellers like it because they know that buyers come prepared to buy. An auction creates a sense of urgency and brings interested parties to a point of decision. Auctions also create and increase buyer competition for property.”

It’s still about the long haul

Rural economist Chris Hurt, Ph.D., professor with the department of agricultural economics at Purdue University, and Mike Duffy, extension economist at Iowa State University, both concur that over the long run, farmland has achieved returns that equal the stock market, but with much less year-to-year variability. The biggest factors that determine return on investment (ROI) is still purchase timing and market fluctuation. Given that even the savviest of economists don’t possess an economic crystal ball, investors analyze history and then make some general assumptions before deciding where to invest. And while all investments are cyclical, there’s a reason sophisticated investors are becoming increasingly comfortable purchasing land.

“It’s not unusual for those in the financial services industry to cite reports with ‘documented results’ from investors who have reaped significant gains through strategic planning and fortuitous ‘market-timing’ to justify investments in stocks,” says Jason Hartman, president of Platinum Properties Investor Network, Orlando, Fla. “Still, as millions of investors can attest, there’s an inherently large amount of risk associated with investing in the stock market. By contrast, purchasing land provides a controllable, predicable source of wealth generation that affords a track record of comfort and stability. That’s because the stock market is a fickle thing. Real estate is far less volatile, has superior tax benefits, provides cash flow, and a high degree of leverage.”

Risk management and control

For decades, real estate has been the most reliable and dramatic wealth generator for a multitude of investors. With the exception of one brief period during the 1980s, rural land has experienced a steady appreciation in value. This track record presents minimal risk to mortgage lenders so it makes sense for them to loan money to investors on attractive terms. Not only does it make sense, lenders are actually anxious to make loans because of collateral safety. If for some reason investors can’t pay, banks still have a physical, appreciating asset with significant value. Land has never gone to zero, as has been the case with many stocks, because it is in limited supply, has universal demand, and has income potential. As investors have experienced in recent weeks, stocks can be afflicted by volatility and suffer unpredictably sharp price fluctuations.

Nothing is certain … but long-term trends point to land

While a return of conditions that contributed to the decline of Midwest farmland values experienced during the farm crisis of the 1980s is possible, such an event is highly improbable. Prudent investors are now considering the purchase of farmland, timberland, and rural property as a means to diversify their financial portfolios. While the lessons learned during the farmland market decline of the 1980s should be considered, the volatility of the current stock market crisis is something investors should take to heart. What goes up also can go down. But the track record of investing in land has stood the test of time — a claim that even the most prudent stock market investment counselors can’t deny.

Source: Farmer’s National

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6 Responses to “Ag-Rural Land Remains A Sound Investment”

  1. The Best Real Estate Info Blog Archive Says:

    … an interesting post today on Loon Lake Realty Blog: Here’s a quick excerpt, “Our real estate division just finished the 2008 fiscal year recording the highest number of rural land acres ever sold,” Farrell says.

  2. Shawn Says:

    I’m new to real estate so this was good information for me to learn about. I really need to see how I can apply this info to the market here in florida, if that’s possible.


  3. stock market investment Says:

    stock market investment…

    I found your post comments while searching Google. Very relevant especially as this is not an issue which a lot of peaople are conversant with….

  4. private communities Says:

    It indeed is a good investment, I have a good friend of mine that invests heavily into “Ag- rural land”. I liked this post. thanks for posting.

  5. richard stabile Says:

    I tend to agree with you about ag land. It is very much a commodity, just like oil, copper, nickle etc. I also think that there are more and more people in the world that need food. Over time this land should do very well.
    I develop and build on land in a very built out area in Bergen County New Jersey, just outside of New York City. However, love trading and that has the same basis for valuation as anything else.

  6. Patrick Says:

    Thanks all for the comments. Land was here since long before the stock market came into being and will be here long after. Trees don’t fall when the Dow falls.

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