Farmland reaps high investment returns

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As a teenager in Wisconsin, Perry Vieth spent his summers baling hay in a neighbor's field. Four decades later, Vieth is farming again. This time, however, the former fixed-income trader owns the land.

"At the end of 2006, I took a look at the markets, didn't like what was on the horizon and decided to move into hard assets," Vieth says.

He isn't the only one betting on the farm these days.

During the last several years, investors have taken notice of the swelling prices and hearty returns that come with productive farms. Individuals and funds are increasingly seeing farmland as an ideal hard asset class.

Farmland generates not only regular income but also capital appreciation and can be used as a hedge against inflation. Another benefit: farmland returns tend to be immune to stock or bond fluctuations, making it a good diversification tool.

"A lot of people like to say 'It's gold with a coupon,'" says Chris Erickson, managing director at HighQuest Partners, an agribusiness consulting firm.

For the year ended December 31, 2011, agriculture proved the best performer among commodity-based exchange-traded products by net inflows. The asset class brought in some $3.5 billion, which raised total assets under management by 50 percent, according to IndexUniverse.

Still, investing in farmland isn't for everyone, especially in the actual land. Investors must deal with upfront costs, more complexity than a typical stock or fund and a lot less liquidity. It also takes a leap of faith considering factors outside an owner's control such as weather, seed prices and trade wars. Global factors such as the demand for ethanol or evolving eating habits are also at play.

WHY NOW?

Despite the potential risks, signs are good that farmland profits could continue, at least for the near future. As diets worldwide increasingly include meat, there is almost universal agreement that the demand for crops to feed China and India will hold steady for years.

In 2011, U.S. farmland generated a total return of 15.1 percent, according to the National Council of Real Estate Investment Fiduciaries. The U.S. Department of Agriculture predicts net farm income in 2012 will be $91.7 billion, the third-highest recorded since 1980. That's down 6.5 percent from last year, but farmland values are still expected to increase almost 6 percent.

In contrast, the Standard & Poor's 500 index ended 2011 virtually unchanged from the previous year.

"In the U.S., what we do well is agriculture. We have the land, the crops, the know-how," says Vieth, whose firm - Ceres Partners - manages a $67 million portfolio of 77 farms consisting of 18,500 acres, mostly in Indiana, Michigan, Ohio and Illinois.

FUNDS

One of the simplest ways for individual investors to get a piece of farm pie is via exchange-traded funds such as the PowerShares DB Agriculture Fund or the Market Vectors Agribusiness ETF.

The latter, a $6 billion fund, is the less expensive of the two, with an expense ratio of about half a percent. It is up 13 percent year-to-date as of March 16, and 25 percent over the last three years.

"Buying farmland directly only works for investors willing to put time into it and be on the ground," says HighQuest Partners' Erickson. "For most people, a stable, longstanding fund is going to be easier."

The number of farmland-specific funds is also rising, with many offering three- to seven-year investment options. Two examples include North Carolina-based U.S. Farming Realty Trust, which opened a $300 million fund in December, and Chess Ag Full Harvest Partners, a $100 million fund based in Mississippi and South Dakota.

RENT AS DIVIDENDS

Some investors are buying the actual land. Jim Farrell, president of the farm management company Farmers National, estimates that half of the farmland in the Midwest is owned by people who don't farm it themselves.

Still, it's a purchase not to be taken lightly. Investing in farmland takes a lot more liquidity and homework than selecting a mutual fund or CD. There also are additional expenses for property taxes, insurance and employing a professional farm manager.

As in most real estate, location is everything. Some of the highest quality — and priced — land is in the Corn Belt region - Iowa, Illinois, Minnesota and Indiana. The average price per acre in Iowa, the nation's largest producer of corn and soybeans, reached a 70-year high of $6,708 in 2011, up 32.5 percent from the previous year, according a recent Iowa State University survey.

Finding value, however, may mean looking outside the highly productive region.

"You have to study the farm, know the quality of the soil, the yields it's had, the long-term capital appreciation," says Shonda Warner, founder of Chess Ag Full Harvest Partners. "But also the problems, what kind of equipment it requires, what maintenance it might need."

Farm management companies and local real estate agents are invaluable resources in judging land's worth. Kevin Dhuyvetter, a professor of agricultural economics at Kansas State, also recommends speaking to farmers or residents in a particular area to learn about weather patterns, previous downturns, or even gossip about a specific property and its tenants.

Crop yields and rental incomes should be major deciding factors. Many farmers, particularly young ones who cannot afford to buy land, will rent tracts to farm. Those rental agreements are key to a piece of land's profitability down the road.

"In Iowa especially there is a surplus of people who are excellent farmers," says Dermot Hayes, an Iowa State agribusiness professor who has bought almost 1,000 acres of land to grow corn and soybeans in recent years. "I provide the land and inputs, they provide the labor, equipment and management, and we split the profits from the crops they grow."

(Edited by Jilian Mincer, Chelsea Emery, Beth Pinsker Gladstone and Dan Grebler)


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