A month ago, news that farmland prices were topping $10,000 an acre was trumpeted in the Wall Street Journal, just as details from the worst drought in half a century were being mulled. To many, it seemed incongruous but to those in the agricultural community, it made perfect sense. That's because, as an asset class, interest in owning and diversifying in farmland has been on the rise, especially at a time when a 10-year Treasury bond won't even get you 2%.
In this installment of Investing 101, John Taylor of the National Farm & Ranch division at U.S. Trust explains that droughts may come and go, but the global demand for food and grains will only keep rising.
"Farmland prices over the last five years have continued to go up and they've really gone up more than their historic averages," Taylor explains in the attached video, adding that despite record prices, farmland continues to be a good investment.
While he says owning farmland is ''clearly not as easy as owning stocks or bonds,'' the research and expectations aren't much different from those used in traditional investing. But the volatility and ''asymmetrical risks." For example, clients who decide to buy a farm are, from the start, urged to think of it on a total return basis that delivers a solid current yield as well as decent long-term appreciation, and to respect the long-term averages on land prices and leases."What you'll typically see is that farmland has about a 5-6% annualized appreciation from an asset point of view, and generally provides around a 4% initial cash yield," from day one, Taylor says. "So all in, it's about a 10% annualized return as an asset class.''
Compared to housing, which garners all attention within the real estate sector, he says farmland is ''dramatically different'' because there's a finite supply, it isn't correlated to traditional market moves, and offers a less volatile, ''steady-eddy'' type of performance. Of course, swings in commodity prices are a factor, Taylor says land and farm lease rates go up and down but remain within comparatively narrow historic bands, and will never go to zero.
"All of the good farmland in America is farmed year in and year out,on these row crops," he says. "There's no vacancy factor, and you're always going to have a current yield."
For that reason alone, it's easy to see why interest in this asset class is currently strong, but when you consider the reduced risk parameters, it can be a slam-dunk addition to some well-heeled portfolios.
"If you look at bigger global trends and the need for grain, we don't think that there's a lot of risk," in farmland, Taylor says. "It's really a play on the global need for food. We think it is still a great time to buy."
Owning a farm may seem down to earth, but dropping the ticket is no small decision. Taylor says $5 million minimums are the norm, which allows for due diligence needed to find the right property (or 2 or 3) that grows more than one type of crop, and also comes with a good tenant and a good lease in place.
If you follow that formula, have patience and realistic expectations, the next auction you pay attention to might not be from the U.S. Treasury, but ratherthe local land office.