Despite rising prices, farmland continues to be an attractive asset class around the world
The real – ie, inflation adjusted – worth of UK agricultural land hardly changed from the 1950s through to the mid-1990s. Then, as the country’s housing market started booming, farmland prices joined in the fun. But unlike British residential property, which has since stuttered, agricultural values have kept on climbing. So is this the peak, or is buying farmland still a good idea? We’ll take a look below – but the good news is, there’s a stock you can buy that’ll make you money either way.
Farmland looks expensive compared to stocks
UK farmland prices have almost trebled in the last decade, climbing from £2,000 per acre in 2001 to £5,500 at the end of 2011. Indeed, values in Wales have doubled in just the last five years, according to a RICS survey in February. So is farmland still good value? One of the best ways to value agricultural land – as with most other assets – is to see what return it’s generating. In other words, you compare its yield against a benchmark, such as the yield on the stock market.
Despite rising prices, even as recently as 2005 buying farmland still looked a good deal. At the time it was yielding only slightly less than the FTSE 100. Here at MoneyWeek, we advised investors to get a slice of the action. However, farmland has got a lot more expensive since then. By contrast, the stock market is hardly any higher now than either 2001 or 2005. This means the yield ratio is right out of kilter. Farmland yields have dropped as values have soared, while the yield on equities is higher than it was. British farmland now looks very pricey compared with the dividends you can get on shares.
Outside the UK, it’s a similar story. US farmland prices have doubled over the last decade. A month ago, Reuters reported that a farm in eastern Nebraska sold for $12,000 an acre. That’s around £7,500, which puts even the prices in Britain in perspective. That level of land prices is high enough to make life tough for aspiring American farmers. If they’re buying the land on borrowed money, they could struggle to make enough profit to service their loan interest. Just to pile on the pressure, the US corn harvest now looks set to be better than was expected a month or two back. That’s because they had plenty of rain in April. That means that corn prices could drop as low as $4.20 per bushel, according to the US Department of Agriculture (USDA). This compares with last year’s average price of $6.20 per bushel.
It’s good news for consumers of corn, of course – but this would really put the squeeze on American farmers’ incomes. Further, the USDA expects that this year, US farmers will plant the most corn since 1937 (inspired by last year’s high prices), which would lead to a record harvest.
Corn prices would then drop further. There would be a knock-on effect on farm prices that would stop the US bull market in agricultural land in its tracks. And the downswing would soon filter across to Britain.
So should you now forget about farmland, and look to invest your money elsewhere?
Original Article : MoneyWeek
By Associate Editor David Stevenson May 16, 2012