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Thu November 1, 2012
Investors angle for a piece of precious farmland
Howard Audsley, who wears dark glasses and has his hair cut short in a crew cut, has been driving his Toyota truck through the state of Missouri for the past 30 years to assess the value of farmland. Barreling down the flat roads of Saline County, Mo., on a recent day, Audsley stopped his truck at a 160-acre tract of newly tilled black land. The land sold for $10,700 an acre last February, double what it would have gone for five years ago.
Heading out into the field, Audsley picks up a clod of dirt. As it crumbles in his hand, he explains why this 15-square-mile pocket of land is the priciest in the state.
“This is a very loamy, very productive, but loamy soil,” Audsley said. “A high clay soil will just be like a rock and that’s the difference between the way [in] the soils. And the farmers know this and the investors know this. That’s why they pay for it what they do.”
It’s not just the value of Missouri cropland that’s rising. Farmland prices all over the Corn Belt – from Iowa to Illinois, Nebraska to Kansas – have been sky-high lately, in part thanks to corn prices topping $8 a bushel.
The high commodity prices have helped encourage investors with no connection to farmland like Steve Diggle to compete for their very own acreage in the Heartland.
“We paid about $3.3 million for our 650 acres odd in Southeast Illinois in 2009,” Diggle said.
Diggle is the CEO of Vulpes Investment Management, which is based in Singapore. The firm manages a quarter of a billion dollars of investor money, about 15 percent of which is in farmland.
“This year we sold it at auction and we got $5.1 million. That’s 55 percent higher than we paid,” Diggle said. “Plus we got two yields – one of 3.5 percent and one of 5 percent. So, you know, as an investment, that’s 63 percent over three years. [It] is great and we’re extremely happy with it.”
Diggle says his firm also purchased a 1,400-acre tract of land in Illinois two years ago. The company plans to hold onto it to make money through cash rents and land appreciation.
“The value of your land may go up or down but as long as bond prices remain where they are, it’s very hard to see how we’ll have a sustained bear market for agriculture,” Diggle said. “Simply because the alternative being given to you by the bond market is just so inferior.”
But you don’t have to spend millions to invest in farmland.
Physics professor Andy Trupin lives in Delray Beach, Fla. He bought a 155-acre tract of farmland in Lebo, Kan., two years ago because it looked like it would make him more money than gold or the stock market. He also owns another tract of land that's primarily pastureland.
“Farmland seemed like a much safer vehicle to get an income stream even though … it’s not a high-income stream, at least it’s more than you would get on treasuries at any duration,” Trupin said. “And at the same time, [farmland offers] price appreciation or to at least hold its value in the event of an inflation period."
The investment has paid off so far, Trupin said. He rents out the land to a local farmer who grows corn, soybeans and wheat. Even the brutal drought failed to knock down the investment.
“Amazingly we managed to get 20 bushels to the acre of corn even though the place was as dry as Las Vegas last year,” Trupin said. “I’m willing to let the income from this thing fluctuate. In bad years, it’s a slight loss – maybe a couple of thousand on the year – and in good years, you gain up to $10,000 on it.”
Trupin found the land online and got help seeing it and purchasing it from a Kansas City, Mo., company called Realty Executives of Kansas City. The company says since 90 percent of its new customers are investors like Trupin, it holds seminars for investors that walk them through the process of buying farmland. Investors learn how to determine what land is good cropland, how to find local farmers to rent the land out to and whether or not the land will be a good investment.
“There’s probably a higher percentage now of people who are strictly investors, stock market people, money market-type investors, and … they’re buying all types of land,” said Dale Hermreck, one of the brokers in the company who says he sold $21 million worth of farmland in Kansas last year. “But the tillable crop raising-property is the number one property everyone’s looking for.”
Hermreck says while there’s always been some outside interest from investors in buying land, there’s much more interest now. Lately he’s been getting calls from all over the country.
“We have a lot of outside interest from Texas, Chicago, New York,” Hemreck said, in front of a 320-acre tract of high-quality cropland in east-central Kansas he just sold for $3,600 an acre. “A few that just called here in the past week. An investor in California looking at some land. I get calls and inquiries all over the United States.”
Does this all sound familiar? Back in 2006, a housing bubble burst in part because of rapid and ultimately unsustainable increases in housing prices. Agriculture economist Ron Plain, who has been teaching at the University of Missouri for more than 30 years, says a similar bubble could one day happen in farmland.
“You get several years going up faster than that long term trend of 6 percent and you’re then in a situation where you’re sort of due for a correction,” Plain said. “And the way you correct is pull those land values down – or ‘pop the bubble’ in modern parlance -- and so there’s concern about that and it’s kind of reasonable to worry.”
Plain says if mortgage rates are at their lowest in 60 years, it’s reasonable to expect they could go higher and that would make paying for farmland that much more difficult.
“When you’re at record high crop prices, it’s reasonable to expect you’re going to stop being at record levels,” Plain said. “Lower prices mean less income per acre and therefore less ability to pay for farmland. So, yes, that’s a very real possibility and a concern for investors.”
Should a bubble burst, farmland might be harder to sell, especially compared to other more liquid investments. But investors argue that any bubble is still far off and believe that farm acreage will remain a solid long-term investment so long as the demand for food continues to grow.
It remains to be seen whether investors will be able to compete with farmers for the small supply of high-quality cropland available in the Midwest, says broker Dale Hermreck.
“I have people call me all the time and I just don’t have what they’re looking for,” Hermreck said. “Simply supply and demand. It’s just not there. I could sell an awful lot more of this land if it was available and people seem to hang onto something that’s making some money and real popular. It’s just real popular now to own land.”