Farmland Vs. Other Asset Classes

You must be thinking, "Brad, this is all fine and dandy.  But why should I invest in farmland and not put my money in the stock market or other traditional areas."  I would say, good question.  You could do that.  You could do what everyone else is doing in investing.  You could go to the stock market and take a risk that it'll work.  You could go a safer route like large cap stocks, commercial real estate or bonds.  You could do that.  You would make money.  But what if I told you, long term, you're much more likely to see a greater return on cropland than you would on just about any other investing avenue.

Now you may say, "Brad.  I've heard you say the farmland always goes up in price.  How do you know that?  Nothing always goes up in price."  And I would say you are correct.  Cropland has dipped in price once.  But you need a bunch of things to go wrong at once.  And one of them has to be a global issue.  The only time we saw a drop in cropland real estate values was during the 80's.  Two things happened at the same time.  We went into a recession and we put a trade embargo against the Russians.  Why would an embargo against Russia drop prices?  They were our biggest grain exporter.  Once you take your biggest international customer of grains out of the picture, things drop drastically.

"Ok.  So land value almost rises.  But how do I achieve a good return on investment?  Isn't that the whole point of this blog?"  Yes it is.  And here's your answer.  Farmers are often romanticized in the media.  They are often portrayed as simple folk who work 24/7 and only worry about rain fall.  While some of that is true the simple folk thing is dead wrong.  Good farmers are some of the best business men out there.  They understand in today's world they can no longer go out and buy land to farm it on a daily basis.  They instead need to rely on investors renting the land to them.  So to make themselves appealing to investors they have to think like one.  They must make sure the rent on the land not only makes the farmer money but also gives the investor a reasonable return on their investment.  This is why cropland continues to be such a good investment option.  The next two charts will show you how investments in Illinois cropland stack up and the second one will show you how cash rent has risen over the years to make sure investors achieve that return.

Now to tie it all together nice and neat for you.  With the combination of the land value, investors need and cash rent availability, we come up with how you can achieve a return that makes you happy.  When these three things meld together we have a deal.  The final chart brings it all together for you and shows the average net returns in the Midwest over the past 60 years.

Wait! Just one more chart!  ...  Just kidding.

Mail Time!

From time to time I will answer some of the questions that you the readers will send my way.  I received a large inquiry recently and decided now is a good time to do it.

Carl in Omaha, Neb., asks: What type of opportunities exists when it comes to investing in cropland?

Brad: Many. There are different ways to improve return on investment (ROI). If it's just pure cropland you can share crop, cash rent or custom farm.  Different investors are comfortable with different options based on their knowledge of farming.  For example, a novice investor would probably start out with cash rent.  It's simple, the tenant farmer pays on lump sum and the investor knows what they're getting.  After awhile they may change it to share cropping which the investor would then be more involved in day to day operations.  They share the risk and income of the land.  Custom farming can be a varied option that I would only suggest to someone who knows exactly what they're doing and may even want to use a farm management company.  Other options could be to buy land with some timber and water on it to add hunting income off of it.  Or find land that has some conservation reserve program (CRP) as well.

Steve in Leawood, KS., asks: What's the process of identifying good investments?

Brad: I'll try answering that question without giving away all our secrets.  First we would identify what it is you're looking to do with the land.  Then we would scour our database and various websites to see what best fits.  The next step would be to have a local farmer that we trust give it his blessing and say he would like to farm.  The final step would be to match the price of the land with the estimated rental to achieve the highest ROI we can for you.  Now there's much more to it than that but that's the basic laymen terms to it.

Angela in Overland Park, KS., asks: How do you manage our risks?

Brad: This is simple.  We have many farmers that we work with in various areas of Kansas and Missouri that we trust.  They will tell us right off the bat whether the land we are thinking about is worth it or not.  Local farmers are the best way to find this out.  I can run my numbers and soil maps on land all day long and it my look great.  But a farmer is the most trusted way to finding good land.

Jenny in Des Moines, IA., asks: Isn't farmland heading for a bubble much like the housing market did?

Brad: No.  The reason I feel so comfortable about that is most cropland buyers aren't borrowing money to purchase the land.  They are cash buyers.  Often they are people who are fed up with the stock market and are looking to put their money into something that's more trust worthy.  Yes farmland has skyrocketed recently.  And eventually it will correct itself.  And what I mean by that is, instead of jumping up 20% in value it will drop back to increasing 3% to 5%.  Remember, land will almost always be worth more tomorrow than today.  It takes a global event to cause land values to drop.

Derek in Liberty, MO., asks: Are there any unique opportunities around the Kansas City area?

Brad: Yes.  I believe the sweet spot of cropland investing runs right along the Kansas Missouri border.  Is it the best pure cropland you can get?  No.  That's Iowa, Illinois and Indiana (the three I's).  However, if you are an investor, the best bang for your buck is the Kansas Missouri border.  Why?  The price isn't anywhere near the prices you'll see in the three I's.  So you can get more land for less and get a much higher ROI.

Danielle in Leeds, UK., asks: What's the best way to get started?

Brad: I had to answer an international question.  But it's a good one none the less Danielle.  The best way to get started is to contact us and set up an appointment.  Now with you we'll probably have to Skype or conference call but we will make it work.  This way we can find out what it is you're looking to achieve and try to find a deal that best suits your needs.  You can do that by calling us a 913-837-4665 or emailing us at info@ruralkc.com.

"Buy Land They Quit Making It!" ~ Mark Twain

A simple quote from one of my favorite authors.  A simple quote, yet one that speaks volumes.  On the surface it sounds funny and makes you laugh like many of his quotes and sayings.  However, once one thinks about it, it makes perfect sense.  

The question is, what makes something valuable?  Money is valuable.  But too much of it makes it worthless.  Gold is valuable.  But if things really go south it just becomes a paper weight.  Homes are valuable.  But eventually they suffer depreciation.  

Think about it like this.  As a young boy growing up just outside Detroit, MI, I love collecting baseball cards.  I even had a book that would tell me how much each card was worth.  I had varying degrees of cards worth varying degrees of money but never amounting to much.  One thing I did know, and anyone who collected baseball cards knows, the most valuable card was a Honus Wagner card.  

Why is his card so valuable?  After all, he was a good play but not great.  He was no Babe Ruth, Ty Cobb or Mickey Mantle.  What was it that made Honus Wagner's baseball card so valuable?  The scarcity of it. 

Which brings me back to Mark Twain's quote.  There is no new land being created.  Unless you're counting the south east coast of the Big Island of Hawaii.  But that land won't be useful in our life time and for many generations to come.  The fact that the land we have is the land we get is why prices for land will always go up.  Yes from time to time land will take a dip.  But it takes a major international event to make that happen.  I will go into more detail on that in a post later.  But to give you an idea of what I mean, land prices didn't go down during the Great Depression.  That's right.  It stayed the same but never dropped.

So when I hear someone say, "Land is going for more now than it ever did before!"  I'll say, yeah that's true.  And that saying will be true tomorrow because land will be going for more tomorrow than it did today.

To give you a good and final idea of what I'm getting at I'll leave you with a quote from Cropland Investment LLC.  "Like buying gold if it paid a dividend."

Who is This Guy?

Who should I use to help me find the perfect farm for me?  What return on investment can I expect?  Where are the best deals to find?  When is a good time to buy farm land?  Why should I buy farm land and not invest in the stock market?  How can I find a trust worthy farmer?

These are common questions we at Rural Kansas City get from new investors.  With this blog I hope to answer these questions and answer much more.  My name is Brad Gaughan senior partner of Rural Kansas City.  First off I know the most important question going on in your mind is, How the heck do you pronounce that boys last name?  Just to avoid future confusion my last name is pronounced like gone.  Think of it like the more common last name Vaughan.  Just substitute the G for the V and away you go.

 

Now that we have that out of the way, the next question would be, why should I listen to this guy.  For one I have lived all over the Midwest.  From Iowa, Nebraska, Michigan, Kansas to Missouri.  I have worked in the agriculture business for the last five years helping investors find farm land that will make a good return.  And, I’m just one heck of a guy.

The gist of this blog is to inform you of what’s going in today’s farming industry and investing.  I will cover what I think is important and you need to know.  I will do my best to explain things in the farming industry in laymen’s term.  Because, believe it or not, farming information and factors can sometimes sound like a different language.  And I invite you to email me any questions you might have.  And don’t be afraid to ask a silly question.  Odds are someone else sitting in same boat as you has the same questions.  My job here is to inform the uniformed and I truly believe there is no substitute for information.

 

So fire away with any questions and comments and lets have fun exploring different aspects of the farming industry.  And hopefully you come away with a better understanding and become a more informed investor of farming.