LAND PROPERTY ASSOCIATES
BUYING, SELLING AND MANAGING FARMLAND SINCE 1987
WHY INVEST
INCOME
Investors in stocks receive income through dividends. Investors in farmland receive income by renting land to a farmer. This can be accomplished under two basic arrangements:
Under a cash rent arrangement, a tenant (farmer) pays a fixed amount of rent to landlord (land owner) to use the underlying farmland. Typically, rents are either paid in advance or guaranteed by a letter of credit.
Under a share crop arrangement, a landlord (land owner) does not receive a fixed amount of rent from a tenant (farmer) but rather receives a portion of the crop produced on the land. The farmer bears all input costs, while the land owner receives a portion of the crop, typically 1/3.
Unlike other real estate, prime farmland is always 100% rented. The reason for this is that farmers aggressively seek additional land to rent. Most farmers need additional land in order to spread the cost of their equipment over additional acres.
APPRECIATION
There have been times when land has declined in value and times of exceptional price appreciation. But on average, prime farmland in the corn belt has experienced steady appreciation over time. The value of land is primarily a function of the income it generates. A farmer’s income is equal to the number of bushels produced (yield) multiplied by the price of grain less the cost to plant. An increase in yields increases income and land prices. While grain prices have traded in a fairly narrow range over the years, crop yields have risen on average more than 2% per year over the last 50 years. This increase in yields, which is expected to continue, is a result of improved seed genetics. So while grain prices have remained relatively low, yields, income and land values have been increasing.
Source: USDA National Agricultural Statistics Service (NASS)
DIVERSIFICATION
To provide true diversification, an investor must have a portfolio that contains investments with negative price correlation. That is, when the price of one falls, the other rises. Farmland is one of the few assets that have a negative price correlation with stocks and bonds. Over the years, the low in price of one has been offset by the high in price of the other. Assembling a portfolio of negatively correlated assets is the only way to achieve true diversification. An investor may have a thousand different investments but if they have a positive price correlation, there will be no true diversification and reduction of risk.