Investing in Farm Land

[matjone]

I grew up on a corn and soybean farm in the midwest in the 80's and saw a lot of farmers go broke.  I came away with a perception of farming as a field in which you borrow a bunch of money, and if the weather or grain prices or anything else God throws at you don't turn out like you expect, you're sunk.  So I crossed farming off of my list of career choices and came away with little knowledge of the financial side of farming.

 

Now that I am older I've come around to the idea that there is probably a right price for anything, including farm land.  I still have no interest in being a farmer, but I am thinking that the ability to value land is a skill that could come in handy during the right conditions.

 

I think a lot of people buy land as a store of value that keeps pace with inflation, and are willing to accept low or no cash flow returns.  That is fine, but I am not interested in that game.  What I am looking for is a way to estimate what the cash flow from owning farm land might be, so that when the time is right and good deals are available I can identify them.

 

Does anyone know what kind of numbers Buffett was looking at when he bought his farm in the 80's?  Or what kind of numbers all the people who went bankrupt in the 80's were looking at when they bought theirs?

 

I have been searching and reading about this on the internet, but I always appreciate the chance to talk to someone with experience.  Are there any other board members with a farming background?  Are there any who have experience investing in farm land who would like to share their knowledge? If you would rather discuss via PM that would be OK too.  Like I said, I have little knowledge to contribute, but I can entertain you with tales of my misadventures in farming.  Thanks in advance,

[sculpin]

Matjone,

 

This may be of interest...

 

http://www.hciventures.ca/media/upload/hci-management.pdf

 

HCI Ventures Ltd. is an established land investment company that has been providing land solutions to farmers since 2005. With a reputation for building strong relationships, and its focus on providing exciting growth opportunities through it's land acquisition strategy, HCI has been able to help farmers realize higher profits and sustainable growth.

 

Farmers can expect friendly, open, and honest communication from the HCI Ventures team. Farm visits are part of HCI Ventures strategy to facilitate the sharing of knowledge and building of relationships that both HCI and farming entrepreneurs can grow on.

 

Today, the company remains true to its values by:

 

looking for win-win relationships with farmers

offering a variety of rental options

focusing on long-term land investments and relationships

working closely with farmers to help ensure mutual success

[JBird]

I lived in Modesto, CA over the summer which is big-time Ag area, almonds mostly. I got interested in exactly what you're talking about for the exact same reason. I've never farmed myself, but I was able to meet 4 farmers and an almond broker who shared their experience. Much like housing, farmland prices are determined largely by comparison to nearby farmland. It's also adjusted for terrain quality, general weather conditions, etc.

 

It depends on what you're farming, but earnings are usually quite cyclical. (Weather conditions, waiting for new trees/plants to mature, off-years to allow land to rest)

 

"I bought a farm from the FDIC 20 years ago for $600 per acre. Now I don’t know anything about farming but my son does. I asked him, how much it cost to buy corn, plow the field, harvest, how much an acre will yield, what price to expect. I haven’t gotten a quote on that farm in 20 years." WEB 2009 Berkshire meeting

 

Over the summer almonds were selling for ~$2.50/lb. An acre will yield roughly 2,000 lbs. At that yield, your total costs will average ~$2.00/lb. Pre-tax profit is ~$1,000/acre. I don't know the tax rates but I'll use 30% for the example, so ~$700/acre after-tax.

 

If almond prices rise with the cost of production, that ~$700/acre is akin to a perpetual annuity. In a world of 7% required-return rates, the valuation is $10,000/acre. Farmland in the Modesto area is selling for anywhere between $17,000 and $30,000/acre.

 

You're absolutely right. What's smart at one price is dumb at another. I think that aside from knowing future crop prices, predicting the future economics here is pretty straight-forward. So just stay on the look-out for price tags that are sensible given an appropriate discount rate.

 

I found this presentation insightful: http://www.almondboard.com/Growers/Documents/The%20Economics%20of%20Growing%20Almonds.pdf

[ERICOPOLY]

If almond prices rise with the cost of production, that ~$700/acre is akin to a perpetual annuity. In a world of 7% required-return rates, the valuation is $10,000/acre. Farmland in the Modesto area is selling for anywhere between $17,000 and $30,000/acre.

 

The yield is 7%, but you make a capital gain of 3% if the price of almonds (along with the cost of producing them) rise by 3%.

 

So that would be a 10% return (7% real plus 3% nominal).

 

[JBird]

 

The yield is 7%, but you make a capital gain of 3% if the price of almonds (along with the cost of producing them) rise by 3%.

 

So that would be a 10% return (7% real plus 3% nominal).

 

Yes

[Ross812]

I've looked at land on the outskirts of existing stone quarries as a potential investment. There are several large quarries in my region that have ~30 years of supply and the city has grown around the quarry over the passed few decades. The land around the quarries sells for about 50% of the land far enough from the quarry to get away from its noise (blasting, large trucks, drilling, etc..) When the quarry shuts down, the pit is filled with water and the land around the quarry becomes lake front property within 10 miles of the city center. This idea may not be a benefit to yourself, but may set your family up quite nicely in a few decades. 

 

http://thumbs.dreamstime.com/z/open-cast-stone-quarry-27068533.jpg 

 

 

[gfp]

I know a group of old guys who did a similar thing with the creation of a man-made lake in Virginia - Smith Mountain Lake.  Back in the early 60's, right before a couple of Dams were going to be constructed, they studied the plans and bought a large amount of property at the proper elevations.  They employed surveyors to make sure they would end up with lake front blocks.  They sold off lots over the years for large profits as well as gaining several "free" lake-front family compounds.  They didn't have a very large delay though.  The Quarry idea seems like holding costs could really hurt the attractiveness - especially if it remains an industrial area!

[matjone]

I've been looking at some stuff on the internet.  The universities in the midwest have a ton of info.

 

One important thing is that non-land costs don't seem that dependent on yields.  Using corn as an example, in IL good land in the central part of the state yields close to 200 bu/acre  and  poorer quality land in the south yields 160, but the non-land cost for good vs. bad land is only about 10 bucks (563 vs. 552 per acre).  This makes sense.  A lot of the costs are really per acre rather than per bushel.  Whether it's good land or bad land you only have to plow it once, spray it once, etc.  You will have a little more cost for hauling it to the elevator though.

 

The price for corn is about a dollar higher in the south which makes up some of the difference, and operator and land return (basically profit to be split between the farmer, landowner and taxman) is only 14 dollars higher for good land vs. bad (409 for high productivity land vs. 395 for low productivity).

 

The strange thing is, from what I've seen, land is about 10k/acre in central il, and only about 5k/acre in southern IL where I'm from.  5k extra for an extra 15 bucks profit?  Cash rents are about double or more in the more productive counties too.  There must be something I'm missing.

[snow pea]

Given the initial posting of & response to this thread and the recent discussion of the Buffett farm, this may be of interest to some of you (available by link or in attachment):

 

http://www.oaklandinstitute.org/down-on-the-farm

 

I just finished reading it.  I found the 'case study' section to be the most interesting, probably because I'm mostly already familiar with the information in the 'future of farming' section, and possibly also because the internal bias is less central to the discussion (though undeniably still visible) than in the later section.  I also think there's a bit of a stretch or even disconnect when connecting the two sections, but I'm not going to spend the time going into more detail on that unless there's interest expressed in discussing it further. 

 

Also relating back to the initial discussion, there is an investment partnership which owns land and is active in my area:

 

http://www.farmlandlp.com/

 

which has some discussion of farm economics scattered throughout their webpage and blog postings.

 

Disclosure: I am a relatively new and small-scale farmer.

OI_Report_Down_on_the_Farm.pdf

[Lance]

Hi matjone - Jim Grant, of Grant's Interest Rate Observer, writes about farm land from time to time.   

 

I'm interested in farm land as well, but don't know much about it.  Would be curious to see what you find.

 

Thanks

Lance

[yadayada]

Im keeping an eye on black earth farming. But apparantly it is really difficult to do farming in that part of the world. Really good land, but not enough expertise to actually make a profit on it.

[adesigar]

Does anyone know any good sites/books/blogs where I can lookup information about farmland, buying from government, historical prices, rents etc etc. Im starting to get interested in it (not because of Buffett), but I have zero knowledge. Its seems like a bubble that could pop. If it pops and prices overshoot to the downside Id like to buy but need to learn about it before I buy. Thanks in advance.

[matjone]

I too would like to find some books or pdfs for basic farmland valuation.  Especially for corn and soybean farming.

 

In the past there was farm crisis after farmers went in debt and bid prices up and restrictions were placed on exports.  I don't know if that will repeat exactly, but my dad has told me he has heard of people purchasing farmland for 0 down 0% interest, and there has been a runup in grain prices  the past several years.

 

You can look into in a lot of detail, but I think Buffett's simple reasoning in his last report seems sensible.  Over the long haul yields will probably go up and grain prices probably will too, so buying at a reasonable multiple of past average profits should give you a decent return.  Back then he seemed to be looking for a 10% growing yield.  I am thinking maybe a little higher multiple is justified today considering the low interest rates and high pe ratios.  I think prices would have to come down 30% or more to get to the level that would get Buffett interested.  It is a little difficult to figure, because costs and grain prices are volatile, but I am thinking looking at 5 year average for costs and grain prices and the trend yield can give you an idea.  The question I have is whether the run up recently in grain prices will be sustained.

 

The universities have good info so I would pick the one in your area.  For illinois it is http://farmdocdaily.illinois.edu.

 

I'd be interested to hear about any resources you find.

 

 

[bobp]

A new issue for the week of 4/7, Farmland Partners, will be a reit, "Farmland Partners Inc. is an internally managed real estate company that owns and seeks to acquire high-quality primary row crop farmland located in agricultural markets throughout North America. We generally lease our farmland to farm operators pursuant to triple-net leases."

 

Underwriters - Baird, BMO Capital Markets, Janney Montgomery Scott

 

Prospectus:

http://www.sec.gov/Archives/edgar/data/1591670/000104746914002858/a2219123zs-11a.htm

 

Road show presentation if this works: http://www.retailroadshow.com/sys/launch.asp?k=21460935407

 

I guess similar to symbol LAND. I Don't know how to evaluate this and have no opinion on it but maybe it's interesting to some of you. I have an etrade account and it's available through etrade. I usually figure if they open it up to etrade it must not be at all hot, but I don't know.

[rukawa]

Black Earth Farming is getting cheap. I think right now its worth a look. Its trading at less than book. In my view its book is also undervalued. We are running out of place to grow food. Eventually Russian farm productivity will go up and when it does farmland values will go up.