Is buying farmland a good investment?

I have a friend whose father buys a lot of farmland. He went from having $0 to a net worth of about $50 million in the span of 30 years. Warren Buffett even owns a big plot of land a few hours from me.

So put on your stereotypical straw hat and bib overalls and let’s look into becoming farmers!!

As most loyal readers know, I grew up on a farm. I’m still pretty involved (harvest video coming up in the next few weeks!). Every adult on my dad’s side of the family owns farmland. They all have their reasons…

“They aren’t making any more land.”

“Land will always be worth something.”

“Even if commodity prices go to heck, you can at least still feed your family.”

And the most interesting answer I’ve heard…

“It’s gold with a dividend!”

All these quotes give me a warm feeling about buying land. It seems all signs point to buying farmland as an wise investment. But, as with everything, I want to look at the facts. I’m stubborn. Plus, it’s hard for me to convince myself to buy when land prices are hovering around $10,000 per acre.

Yep, one section (mile by a mile) of irrigated land in Nebraska (which isn’t even enough land worth bragging about) can easily go for $6,400,000. Plus taxes.  And it’ll take easily $700/acre to grow the most popular crop – corn. And after paying those bills, you only have the potential to make a profit. You’re sitting at $6,840,000 to begin farming 1 section of land. With ZERO guarantees of making even a buck.

BUT without risk, you’re without reward. So hopefully I haven’t scared you too much. We can’t just look at the expenses, we have to look at the potential profit. Plus, it’s not like you or I can’t get started with less than $6 million – much less, actually. But first let’s figure out the rate of return we would need to get in order for all this to be worth our time.

What Would You Do with Your Money Instead of Buying Farmland?

Right now I have my first $100,000 I earned and more invested in the stock market. I’m comfortable with that. Year-to-date I’ve probably made 18-23% on that money. I <3 equities. And all this is in my lazy portfolio.

But this is not a typical year. In a typical year invested in the S&P 500, you can expect 13% (1970-2013).

What else would you invest your money in? Tangible items such as cars, houses, comic books, and John Wayne memorabilia are all terrible investments. You could buy real estate, but that nets you about the same as the S&P 500 with additional headaches. Bonds are terrible for returns but they do stabilize your portfolio so if you want to have your age in bonds, that’s cool.

More about bonds in a minute because that’s actually very important when considering whether or not to buy farmland.

So basically, we need a 13% return in order to get into the industry of agriculture.

How Much Can I Earn from Buying Farmland?

The reason farmland is often called “gold with a dividend” is because you can expect 5-6% annual appreciation for the land and another 4% for the crop you raise each year. 10% APY typically according to an article from Yahoo Finance. But the story does not end at 10%!

*checks clock* I’ve researched now for 5 hours trying to nail down an exact rate of return on land. The trouble is… it’s difficult. Why? For about a billion reasons but I’ll rattle off a few…

  1. It depends what type of commodity is grown and its current price in order to project your ‘dividend’ return
  2. Farmland closer to a city, rises in value more rapidly for obvious reasons
  3. Former non-irrigated land, with new technology, can now be irrigated (doubling the price) so that screws up the typical rate of return since some farms get lucky and find water and some don’t
  4. Nut jobs in certain areas buy up land for far more than its worth just to flaunt their ego/inflate their ego
  5. Land typically sells once in a generation. So it’s hard to gauge a plot of land’s true value since its surrounding land hasn’t been put up for sale in such a long time. No one really knows what a property is worth if nothing around it is selling. People can guess but without capitalism working in its full cycle, you’re not sure.
  6. How you buy it makes a difference – live auction, silent auction, talk your neighbor into selling to you privately…

If you want some painful reading, check out these 2 academic papers I read: Farmland and Values: Current and Future Prospects and Purdue Ag Economics Report August 2014.

So from what I can tell, 10% is easily obtainable. And upwards of 20% per year is possible. Buying farmland is still on my radar…

How Can I Buy Farmland and Make That 20% per Year?

Again, this is complicated. I wish it was all hay rack rides and making dolls out of corn husks, but it’s not. Movies lie – farming is difficult. But for 20% APY, it’s worth figuring out.

Our Options:

1) Buy non-irrigated ground. The land is less than half the price of irrigated at around $4,000/acre but your crop will be worth less each year since it doesn’t get any water but rain.

2) Buy irrigated ground. $10,000/acre and you’re basically guaranteed to raise a fine crop each year.

3) How will the land get farmed? Cash rent? Sharecropping? You farming it yourself?

4) 3 million people own America’s farmland. Not all of them are farmers. You can buy into a farm using REIT’s like those listed in this article.

In upcoming posts, I’ll talk more about how to get 20%. And before the end of this series on farming, I’ll determine if I’ll put my own money into farmland. Following in the path of the $50MM man and Warren Buffett sounds like a good decision.

Conclusion on Whether or Not to Buying Farmland Is Wise

Buying farmland is a wise investment as long as you buy when the prices are down. In equity investing (the stock market), this doesn’t make a ton of sense. But when it comes to farmland – it is very cyclical and it’s fairly predictable. About once every 20 years, land prices spike and fall. If you buy on the fall – and ONLY on the fall – you have the chance to earn more than with equities. If you are not patient enough though, it makes little sense to buy farmland. Unless you’re doing it largely for enjoyment – then go right ahead.