Farmland Prices Surged 22%… Should You Buy?
I’ve never seen anything quite like this…
The price for an acre of farmland has gone ballistic. The ultra safe asset shot up 22% last year!
When I first read the news I thought, “This is great!”
You see, my family has owned irrigated cropland in central Nebraska for more than a century. (And I’ve been a big proponent of buying farmland.) I was obviously thrilled to hear the value of my family’s largest asset gained 22% in a single year.
But the more I think about it, the more worried I get. Now I’m wondering if a 22% pop in real estate prices is as great as it sounds.
Don’t get me wrong, I like when an investment goes up in value. But when a steady asset like farmland starts acting like a small-cap growth stock, it makes me a little suspicious.
Let me explain…
Over the last decade, farmland prices have been trending steadily upward. They rise about 8.5% per year on average. But last year they increased nearly three times as much as normal! That’s a huge red flag in my book.
What’s driving these huge gains?
In short… high commodity prices.
It’s a very unique time in agriculture. Major cash crops like corn, wheat, soybeans, and cotton are all trading at or near record highs. And at the same time, the costs of inputs like seed and fertilizer are lagging behind.
The result… farm income is surging to record highs.
In fact, the USDA just released their 2011 forecast. They expect farm income to hit $94.7 billion… that’s nearly a 20% increase from the already high levels of 2010.
Clearly, another year of record high farm income bodes well for farmland prices in the short run. We’ll likely see farmers flush with cash bidding up the price on any farmland that comes up for sale.
But I’m not buying… I think farmland prices have moved up too far, too fast.
So I’m changing my stance on farmland. I’m moving it from a buy to a hold.
Here’s the problem…
Net farm income isn’t likely to stay at these elevated levels beyond 2011. Rising input costs for seed, fertilizer, and fuel are already starting to eat into profits. And if history is any guide, input costs will continue increasing even as commodity prices level off.
In other words, net farm income will likely decline after this year. And if farmers have less money to spend… farmland prices will likely come down too.
The bottom line is…
I believe farmland should be part of any investment strategy. In my opinion, it’s the best way to diversify your stock portfolio. And it’s an excellent hedge against inflation.
But at the same time, I’m not willing to overpay. I believe in buying assets at a reasonable price. And right now farmland is just too expensive.
Farmland prices will likely fall as farm incomes are squeezed by rising input costs. So there’s no reason to get in a bidding war with cash rich farmers this year. Just bide your time and wait for a better opportunity to invest in a year or two.
Category: Real Estate
