Imagine, if you will, that a relative passed away 40 or 50 years ago and left you a $1,000 bequest. At the time you had a choice of investing the money in Iowa farmland or the stock market by purchasing shares in the Standard & Poor’s Index. Which would have been your better investment?

Farmers will automatically respond by saying farmland would have been the better investment. But other will look back on the bullish market of several years ago and point to that as the better choice. Economist Mike Duffy of Iowa State University used a recent newsletter to compare the two potential wealth-building choices. He says since 1990 the estimated average value of Iowa farmland has more than tripled from $1214 to $4371 per acre. On the other hand the S&P Index lost 32% of its valued from 2000 to 2008, but its climb from 1990 had been impressive with an increase of over 100% from 1990 to 2009. Duffy went back as far as 1960, and with lessons learned, offers some thoughts about the future.

The value of the investments has to be divided into two parts says Duffy, one of which would be the capital gain or increase in value and the second will be yearly returns. Both may have some fees that have to be paid. For farmland, Duffy says those costs are a farm management fee, taxes, maintenance, and insurance. For both farmland and the stock market, the initial investments bought a specific amount of an investment. In 1960, the average farmland was selling for $261 per acre, so 3.83 acres were purchased, with annual net rent returns being used to buy more farmland. In 1960, a $1,000 investment would have purchased 17.6 shares of the S & P Index. Duffy says annual returns ranged from 2.8% to 7.9%. For the S & P Index, the annual returns ranted from 1.2% to 5.4%.

At the end of 2009, an investor would have 32.87 acres worth approximately $143,672 or they would have 75.58 shares of the Standard and Poor’s worth approximately $83,805. While that represents only 58% of the value of the farmland investment, Duffy says there are periods since 1960 that returns to the stock market have been higher. He says for the most part, land has show higher returns over the past 49 years.

Duffy notes that if the investments had been made in 1970, the land investment in 2009 would have been worth $58,456 and the stock investment would have been worth $39,029, with the latter being 67% of the former. If the initial investments would have been made in 1980, the $1000 investments would have purchased only .48 acres of land worth $8314 today or 7.49 shares of stock worth $17,365 today. He says the timing of the investments makes all the difference, and land would have been a better investment in all years except from 1974 to 1984.

Looking ahead, Duffy rhetorically asks what will happen to land investments in the next several years? He says the value of land is determined by its income earning potential and crop prices will have several factors that influence their value, such as oil prices, crop yields, production costs, the economic recovery and other issues. With land being purchased by older buyers, the transfer of ownership to the next generation will mean more landowners and probably more out of state land owners who may want to sell. Duffy says too much land being offered for sale could become a problem at some future time. And he says the performance of the stock market could be a function of the economic recovery and government ownership of companies, with a growing deficit, the balance of trade, and other issues. He says only time will tell whether land continues to outperform the stock market.

Summary

Depending upon the year when an initial investment was made, farmland might outperform the stock market, and in other years, the stock market would be a better place than a farmland auction to invest your money. In the future farmland prices will depend on crop income, which is dependent upon many factors, including the recovery of the economy. Just the same, the economic recovery will have a great influence on the value of stocks, if you are considering an investment today.

Source: Stu Ellis, University of Illinois