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Senior Contributor

Comparing the stock market and Iowa land values: A question of timing

For you guys wondering if farmland has been a better investment than the SP500 Stock Index, below is a short example comparing the two between 1960 to 2009. Sorry that this research paper by Iowa State University hasn't been updated since 2009, but between 2009 and 2012, Iowa farmland has increased by over 100% so the comparison between Farmland and the SP500 would favor farmland by even a much higher amount. It is good to know that us farmland investors have made a good choice by investing our money in farmland rather than the stock market. Below is a short example/comparison:

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Comparing the stock market and Iowa land values: A question of timing

Figure 1 shows the return to $1,000 invested in 1960. At that time, $1,000 would have purchased 3.83 acres or 17.6 shares of the S&P. Using the assumptions above, an investor at the end of 2009 would have 32.87 acres worth approximately $143,672, or they would have 75.58 shares of the Standard and Poor’s worth approximately $83,805. In other words, the value of the S&P investment would be only 58 percent of the value of the land investment.

There have been periods since 1960 when the returns to the stock market have been higher. However, for the most part, land has shown higher returns over the past 49 years. It is interesting to note the recent dramatic swings in the S&P, as shown in Figure 1.

Figure 2 shows what would have happened if the $1,000 investment in land or the S&P had been made in 1970. At that time $1,000 would purchase 2.39 acres or 11.1 shares of the S&P. By 2009, the land investment would have been worth $58,456, while the S&P investment would have been worth $39,029. An investment made in the S&P in 1970 would be 67 percent of the value of an investment in land.

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Senior Contributor

Re: Comparing the stock market and Iowa land values: A question of timing

Below is a short Conclusion to this research paper. Guess we can pat ourselves on the back since our farmland investment has far, far, exceeded the city people's investment in the stock market.

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Conclusions

Which is the better investment, Iowa farmland or the stock market, is a complicated question and one for which there is no one best answer. Several factors need to be considered when trying to answer this question and several assumptions have to be made.

In this paper, real estate taxes, a management fee, insurance and maintenance were subtracted from the return to land. These were the only ownership costs assumed for land. There would be other costs that would vary with the individual circumstances.

This study also assumed there would be no transactions costs. There would be costs associated with either the purchase of land or the purchase of stocks.

Finally, this study assumed average performance for land values, rents and for the stock market. Deviations from average performance would produce different results.

The majority of land is purchased by existing farmers. They purchase the land for a variety of reasons that may or may not fit with traditional investment theory. In spite of this, land, over the long run, has produced competitive, if not superior, returns compared to the stock market.

What will happen to the value of farmland over the next several years? The future is hard to predict, but in this case it is especially difficult. There are several factors that will have an immediate impact on land values and other longer-term factors that will determine the future performance of land.

The value of land is determined by its income earning potential. For the most part, in Iowa, that means the returns to corn and/or soybeans. Returns will be influenced by a number of factors over the next several years. Oil prices, ethanol prices, crop yields, costs of production, economic recovery, alternative biomass sources, and a host of other major issues will have an influence on the price of land.

Another uncertainty in the land market is the changing landowner demographics. In 1982, 12 percent of the farmland in Iowa was owned by someone over 75 years old. By 2007, this percentage had more than doubled to 28 percent. In 2007, over half, 55 percent, of the farmland in Iowa was owned by someone over the age of 65. How this land will be transferred from one generation to the next is not entirely clear at this time. It appears that the majority of it will be passed on to the children, usually in equal shares. This means there will be more landowners and more out of state owners. Whether they will want to continue to own the land or sell it is unknown. Too much land being offered for sale is not a problem at this time but it could become one if the next generation doesn’t want to hold on to the land.

The performance of the stock market for the next few years is also not clear. The impact of the stimulus package and how soon it will be felt are unknown at this time. Further compounding the situation is the impact of government ownership of several major companies.

The budget deficit continues to grow and will place a burden on the economy as the U.S. seeks to find ways to support the level of expenditures and revenues it has seen over the past few years.

The imbalance of trade is another area of uncertainty with respect to possible impacts on the U.S. economy and the performance of the stock market and the land market.

A complete discussion of all the factors that could influence the land or stock market is beyond the scope of this paper. Suffice it to say there is considerable uncertainty as one looks ahead. While uncertainty about the future is not new, there is a level of concern for both the land market and the stock market.

Land and the stock market are different types of investments and assets. This simple comparison was based strictly on averages. There are a number of individual stocks that perform better than the S&P. But, there are some that don’t perform as well. Anyone contemplating the question which is a better investment needs to know their goals.

Land’s performance relative to the stock market over the past few years has been spectacular. Will this trend continue, time will tell. Which is the better investment? As the old saying goes, timing is everything.

 

 

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Senior Contributor

Re: Comparing the stock market and Iowa land values: A question of timing

An updated review till the end of 2010. A $74,747 difference between farmland and the SP500 at the end of 2010. Boy, that's a huge difference between the 2 on the intial investment of $1,000 made in 1960. Yes, we have done far, far, better by putting our money in farmland over the stock market.

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Analysis

Figure 1 shows the return to $1,000 invested in 1960. At that time, $1,000 would have purchased 3.83 acres or 17.6 shares of the S&P. Using the assumptions above, an investor at the end of 2010 would have 33.57 acres worth approximately, $170,012 or they would have 76.73 shares of the Standard and Poor’s, worth approximately $95,265. In other words, the value of the S&P investment would be only 56 percent of the value of the land investment.

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Senior Contributor

Re: Comparing the stock market and Iowa land values: A question of timing

Are dividends part of the stock side of the study.  I know I have a stock with over 5% yearly dividends.  I believe this would affect the study.

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Senior Contributor

Re: Comparing the stock market and Iowa land values: A question of timing

Farmer46- yes, dividends are calculated into the SP500 overall return ratios. Let me see if I can post that part of the research paper for you to review. 

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Senior Contributor

Re: Comparing the stock market and Iowa land values: A question of timing

Below is how and what is included in establishing the data, so yes, you can see that dividends are included in the data results.

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Data

The returns to land or stock shares are composed of two parts. The first is capital gains or the increase in value. Obviously, this also could be a capital loss if values decrease. The second component is yearly returns.

Owning land has an unavoidable annual ownership cost not associated with stocks. Property taxes must be paid and should be included in a comparison of owning stocks or farmland. Additionally, if farmland is held as an investment and not by an owner-operator, there could be a professional farm manager involved and the fee for this service would have to be considered. There is also a need for some maintenance and insurance with farmland not associated with owning stocks.

The data used for this analysis comes from different sources. The Iowa average land values come from the yearly Iowa State University Extension publication FM 1825. The average farmland rental rate was obtained from USDA/Economic Research Service (ERS) in the Land Use, Value, and Management briefing room. The average land tax per acre is calculated using data from ERS farm income data. Taxes per acre were calculated as the real estate taxes paid divided by the total number of acres.
The Standard & Poor’s averages and yearly dividends for 1960 to 2009 were taken from the web site of Dr. Robert J. Shiller at Yale Univesity (www.econ.yale.edu/~shiller). The value used is for December of each year.

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Honored Advisor

Re: Comparing the stock market and Iowa land values: A question of timing

This comparison should apply to virtually any real property v. stock returns.  

 

I know we have one house built in 1974 for $32,500, that has a replacement insurance value of about $250,000 today.  Another with a construction cost of $2500 in 1938 is valued over $150,000.  Time has treated us very well with those two assets. 

 

Looking at the only farmland we've bought outright, from outside family sources, value today is 5-6 times what we paid in 1994, and 60% of it has stands of growing timber that have much greater value almost 20 years later.  

 

Maybe this isn't as speculative as Iowa farmland, but it isn't too shabby, either.  Of course, those dollars aren't worth what they used to be, either...

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Highlighted
Senior Contributor

Re: Comparing the stock market and Iowa land values: A question of timing

Thanks for the info.  This should be the number one topic of High School econ.  Long term investment, even when you do a bad investment, time can heal your hurt.  I purchased land in 74, farmed it.  The purchase price was low, it always stayed a positive.  I purchased land in 81, farmed it. In 3 years the land was neg over 50%.  That 81 land did not come back to even until 90's, and now it is 8 times positive.  The real question for a older farmer is:  Can I withstand a land pullback?

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Frequent Contributor

Re: Comparing the stock market and Iowa land values: A question of timing

Interesting. Does your comparison include dividend reinvestment in the case of the S&P? How about income from the farmland?

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Honored Advisor

Re: Comparing the stock market and Iowa land values: A question of timing

I am an " older farmer".  Actually, we are about average age, turning 59 this year. 

 

My sentiment about "lost" value in real estate is pretty much what I said to a couple of people about houses in 2008.  If you had held onto a house for a while, and bought it to shelter your family, instead of as an "investment", then as long as you still had a roof over your head, regardless of what it would appraise for, it was still " worth" what you bought it to do.  It you hsd held it for a while, then it probably reflected a good increase in " value", too.

 

if you buy land to farm, and can still farm it, or lease it, ans stay ahead of where you were before, then it is doing what you bought it to do.  Even if there is a drawback in prices, if those things hold true, you are okay.

 

I think people went nuts buying ever- bigger houses, far more than they needed to house their families, in the illusion of amassing ever-growing wealth.  It was a bubble, as we all know now.  People like us, who bought or built houses to actually live in, never felt a thing. 

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