A Bad Year? Not a Bad Investment
God bless the farmers. They may need it this year.
Last week I tuned into a presentation on agriculture land values. It was fascinating. For farmers, it may have been nauseating. The presenter did not paint a pretty picture for farm profitability – at least for row crop producers this year.
And yet, my take-away from the presentation was quite positive. It supported my strong belief that farmers are some of the best investors in the world. Say what you wish about farmers’ fondness of fancy pickup trucks and high-dollar machinery. When it comes to land, farmers do it right.
The presentation covered a lot of ground, but I was drawn to two points in particular. The first was the trajectory of land values over the past four years. The second touched on rental rates for farmland. Both beautifully illustrated why I am convinced farmers have a successful approach to investing.
Let’s start with land values. According to the data in the presentation, the value of non-irrigated farm ground in Kansas has fallen by nearly 22% since 2015. That’s an interesting number, but it is not extremely helpful. Averaging land values across the entire state dilutes the effects felt closer to home.
In real estate, it’s location, location, location. Fortunately, the researchers dug deeper.
They provided a breakdown of land values in nine separate zones in Kansas. Nemaha County fell into the Northeast zone, along with Brown, Marshall, Doniphan, Atchison, Jefferson, and a few other nearby counties. In our neck of the woods – or plains, perhaps – non-irrigated farm ground values have dropped by approximately 16% since 2015.
What really struck me, however, was the volume of sales. In 2014 and 2015, land values hit an all-time high across Kansas. It just so happens farmers also sold more acres in those years than they have before and since that time.
The first rule of investing is to buy low and sell high. The general trend shows farmers in this region did just that. For those interested in selling, they chose an opportunistic time to get out. Keep in mind, for every seller there is a buyer, so to be fair, someone was buying at the high point, too.
In case you are wondering, Nemaha County seems to be an outlier. While the vast majority of counties in Kansas slogged through a drop in land values since 2015, non-irrigated crop ground in Nemaha County actually increased by nearly 5% in that time period, according to the data.
But even if local land values would have fallen, I am confident our local farmers would have avoided panic selling. The market doesn’t instruct their decisions. The same cannot be said for many investors in the stock market, who often allow lower market prices to stimulate their decision to sell. Farmers don’t.
As I mentioned, there was a second take-away from the presentation that further reinforced my view that when it comes to land farmers make excellent investors. It involves rental rates. This is where the data get scary.
The researchers calculated a per-acre rental rate the typical producer should pay in 2019 to earn a reasonable profit. That rate was computed based on production costs, expected yields and current commodity prices.
According to the estimates, farmers in Nemaha County should not pay more than $90 per acre in rent if they want to earn a decent profit on average ground in 2019. Ouch.
I suspect most producers are paying well in excess of that rate. If the estimates are even in the ballpark, most farmers are likely to lose a bundle on their rented acres in 2019. And yet, I bet if I had 80 acres of good cropland, I would have plenty of farmers willing to pay me $150 an acre today in rent.
So how does that make them good investors? Because they take the long view.
If an average investor was told they are very likely to lose money by investing in the stock market over the next year, most would avoid the stock market like the plague.
But as farmers understand, it’s not about the what happens next year, but also the year after that and the one after that. If it’s good farmland and a reasonable rental rate, they are willing to endure a bad year here and there.
If more people held their stock investments for the long-term, like farmers buy and rent land, they would be far more successful. For stock investors, the lesson is simple. Take advantage of market movements – don’t give in to them.