“Past Thoughts” Seven Reasons Farmland Beats Paper

Almost 30 years ago, for the first time ever we handed our front page article over to a guest writer. That guest writer was my dear friend Porter Martin who passed away earlier this month. In honor of my friend, we are featuring his guest article as our “Past Thoughts” in this edition.
In the article Porter discusses “Seven Reasons Farmland Beats Paper.” The article would be quite different if written today I am sure, but I doubt the title would have changed, but the reasons may have. – Murray

Seven Reasons Farmland Beats Paper
By Porter J Martin
January 1994

Porter J Martin, AFLM, is a world recognized farm broker and consultant. Through his office in Dekalb, Illinois, Porter counts as clients influential agriculturalists all around the world. We are pleased to have him as our first ever guest writer for our lead article.

We work with a rising number of investors who are not looking to make money fast. They’re looking to keep what they’ve already made. And in today’s environment, losing can happen fast!

As examples, I’d point out that we’ve just passed the anniversary of the Crash of ’87. You remember. The Dow plunged 40% in a couple days. I could also mention the enormous number of corporate bonds used to finance leveraged buyouts in the 80’s… many of which or worth 60 cents on the dollar today. Some experts suggest the best combination of safety and return may be long term Treasury bonds. Safety, for sure. But, if interest rates jump up unexpectedly, bond values will plummet.

The point is, there is no single class of investment which is always the “best and safest.” John Templeton, who built the world-famous Templeton funds, stressed that the safest investment portfolio was built on basic value and diversity. We believe it. And we also believe investors can find such qualities by including American farmland in their long-term investment programs. Here are seven reasons why investors with heavy investments in stocks and bonds should take advantage of the inherent value of farmland and the current market situation to diversify their portfolios.

1. Farmland Values Have Deflated
One of Templeton’s basic strategies is to invest in industries whose prices have corrected to (or below) basic value relative to long term earnings potential. In the 70’s speculative pressure drove Midwest farmland values up by almost 400%. But, in the early 80’s farmers watched as the land they financed at $2,500 an acre dropped to less than $1,000! Now, in the early 90’s, prime Midwest farmland is valued at levels which yield a net current cash return of 5% to 7%… in line with farmland’s historic earnings rate.

2. Growth Since Deflation a Sign of Solid Market
Since the low value point of the correction of the mid-80’s farmland has recovered 50%. Surpassing a 50% recovery is a powerful technical signal of a solid market. At the low point, we saw dis-equilibrium of farmland relative to other assets and a few daring buyers acquired farmland for and reaped the harvest of the subsequent appreciation. Even today, the typical farmland buyer only finances about 50% of the purchase price. This means land is increasingly held by owners of substantial financial means. A $2,500/acre farm, 50% financed at 7% can generate positive cash flow when rented for cash or on shares.

3. Land’s Wealth Preserving Characteristics
BCA Publications Ltd. Of Montreal is an independent forecasting firm which anticipates that “The bull markets in equities and bonds have further to run. However, the asset inflation is entering a more speculative and dangerous phase.” Reasons for this concern include the low dividend yield on the S&P index and resultant high Price/Earnings ratio; rising stock market debt, record net mutual funds investment indicating small investors are rushing into stocks; anticipation in the market for even higher earnings performance without evidence of its likelihood; and so on. Sounds something like the speculative frenzy in farmland in ’79 and ’80. Meanwhile, farmland has been ignored by all but a few “contrarians.” They’ve acquired prime parcels of farmland which will provide a solid footing when the next “massacre” hits Wall Street.

4. We See Signs of Commodity Price Rebound
Since 1981 we have seen a deflationary slide in global commodity prices. However, there are recent, subtle, and largely unnoticed signs of a rebound. The Commodity Research Bureau’s index of agricultural and industrial commodities has punched above a five year down trend line and is expected to show continued strength in the coming months. Prudent investors will consider the downside risk in holding stocks versus “hard” assets such farmland which produces basic food and fiber. Would you rather buy near a ten-year high (stocks) or a ten year low (commodity-related assets)?

5. Increased Agricultural Market Share
Exports of value-added farm products, particularly meats, rose by 335% in the period 1985 to 1990 and the trend remains intact. The passage of NAFTA will further level the playing field in the Americas providing further boost to agricultural exports. In addition, the world’s population is expected to grow by 3.5 billion in the next forty years with most of the growth coming in “developing” countries like Mexico. In such countries a large share of improved incomes is spent on improving diet . . . and that will mean more exports from America, the world’s most efficient producer of food.

6. Farmland is Real . . . Not Paper
The most spectacular profits of the decade to this point have come from moving money around rather than from producing something tangible. We see more merger and leveraged buyout activity daily as the lessons of the past seem to fade. Bank failures and the savings and loan debacle, made worse for their investment in junk bonds and speculative loans, are already forgotten. But the point remains that many paper investment remain vulnerable to poor judgement, mismanagement, and outright fraud although they’re packaged well. Uninsured money market funds, urban real estate investment trusts, commercial paper and an array of financial derivatives promise high earnings to people weary of the low return on insured CDs or other assets.

In contract, “A farm is something I can walk on,” says retiree John Northwall of Omaha upon buying his third farm. “I know the land is in my name at the courthouse. I can have the satisfaction of leaving it . . . in more productive condition than it was when I bought it.”

7. The Farmland Bonus
As Mr. Northwall says, farmland is a tangible asset . . . but one which offers the right person a most valuable intangible return. Ownership of farmland provides a sense of roots to some people. To others the peace and beauty of the rural countryside is an attraction . . . the smell of freshly cut alfalfa . . . a connection with living things, with life itself. It can be uplifting.

Sociologist Jack Lessinger projects that towns of 50,000 people in counties now considered rural will lead the nation in population growth over the coming decades. The rural heartland has preserved more of what people want for their lives: Safety, community, good education . . . and a healthy place to raise children.

Throughout America’s growth the past 200 years, it has been the non-farm demand for rural land which ultimately lifts its capital beyond that 5% to 7% “cap rate” for farm production alone.