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    Investing in farmland

    There are good reasons to invest in farmland and Douglas Hodge, District III vice president of the American Society of Farm Managers and Rural Appraisers, outlined farmland’s many investment enticements from an institutional perspective during The Chicago Farmers’ April 10 meeting. Hodge also is part of Nuveen’s APPR Services/Risk Management group.

    “Historically, from an institutional perspective, farmland is a solid investment,” said Hodge. “It provides steady income, serves as a hedge against inflation, and reacts differently than equities to outside stimuli. It is a risk alternative to other investments. Plus, they are not making more farmland in the United States.”

    Hodge did note that unlike the United States, acreage in Brazil is increasing, but at the expense of the rain forest and many green spaces in that country.

    With the acreage of farmland not increasing in the United States, how can farmland be used most effectively? Hodge said that world demands have to be considered. Agriculture has been a key to energy through ethanol. Additionally, as third world countries improve, their populations are moving away from a grain-based diet to a meat-based diet. Technology has allowed increased production to begin meeting the growing world demand for food, Hodge added.

    As an aside, Hodge related that recently he met with a delegation from China and he learned that the typical farm in China is seven to 10 acres. The Chinese want the technology and equipment that the United States has so they can grow the food they need. “China is our greatest export market, so this Chinese goal could be bad news for the United States,” Hodge remarked.

    Among other reasons to invest in farmland is the preservation of capital, said Hodge. He noted that he personally recommends investing in farmland, which can be used to feed people. Former dairy farmers, Hodge and his wife are beginning to invest in farmland.

    He noted that farmers’ financial statements are stronger now than they were in the 1980s so he does not foresee the problems that plagued that period.

    “You have to keep in mind that you have to be in a farmland investment long-term,” said Hodge. “The next closest hedge against inflation is gold or silver.”

    The growth in bio-fuel presents more opportunities for agriculture, according to Hodge. Noting that 25 percent of corn is used for fuel, Hodge said other opportunities besides corn will present themselves. He noted that sugar cane is used for bio-fuel production in Brazil.

    While returns have declined on farmland, it is not a reason to panic, said Hodge. “Remember, it is a long-term investment. The average return on farmland has been 12.5 percent over the last 20 years.”

    Nearly one-half of all farmland will transfer ownership in the next 20 years, said Hodge, so it is important to take a careful look at estate planning.

    “The average age of the American farmer is over 50,” said Hodge. “As we age, who will buy our land? It is possible that the older famer can own the land and cash rent to younger farmers.”

    He added that less than one percent of farmland in the United States is owned by institutions. It is mainly owned by farmers.

    Hodge said that Nuveen is buying farmland in the Midwest and the Pacific Northwest. He said there also are investment interests in Brazil, the eastern and western parts of Australia, Eastern and Central Europe, and Africa. Nuveen buys Class 1 farmland, he said. “More and more money is chasing this category of land.”

    Hodge shared that the Creighton Farmland Index is a good tool to use to see how values are tracking.

    What are the cons of farmland investment?

    • The risk of inflation and deflation
    • Volatility of commodity prices
    • Lack of liquidity
    • Possibility of high transaction costs
    • Geo-political risk

    Hodge pointed out that top quality land will not decline in value as less desirable land will. He noted that fundamentally, farmland is real estate and the adage, “location, location, location,” also applies to it.

    The current market indicates that farmland owners are facing lower values; however, commodity prices are stabilizing, said Hodge. On the negative side, there is a potential for higher interest rates and that has to be closely watched.

    He went on to say that cash rents are likely to decrease; there is a correlation between land values and cash rents. Hodge said there will be some harder negotiations between the farmer and the owner.

    Hodge added that investors have to be aware of what is happening in Washington regarding trade issues because it will have an impact on commodity prices.