The S&P averages and yearly dividends from 1970 to 2012 were obtained from the website of Robert J. Shiller at Yale University. The value used is the December close of each year with the exception for 2012 being the month of June.
A few assumptions are necessary in the study. For the first analysis summarized in Figure 1, it is assumed $1,000 is invested in each alternative at the end of the first year (1970). The initial amount of land or stock purchased was based on the 1970 value. For example, the average dryland cropland value in Oklahoma was $257 per acre in 1970. Thus, 3.89 acres could have been purchased for $1000.
A second assumption is that all net land rent or dividend earnings in any year will be reinvested in the land or the stock market. This will increase the number of units held. To continue the example above, average cropland rent in 1971 was $9.50 per acre. Average taxes in 1971 were $0.58 per acre. Using a management fee equal to 7 percent of gross rent and a 6 percent of gross rent charge for insurance and maintenance, the net return per acre in 1971 was $7.68.
The net rent in 1971 represents a 2.91 percent return since the average cropland value had increased to $264 per acre. For the $1,000 investment, this would be a return of $29.10. If the entire return were invested to purchase additional land, .11 acres could have been added to the portfolio. Thus, at the end of 1971, the investor would have 4 acres worth $1,055. The process is repeated each year.
Considerable annual variation was noted in the investments examined. Non-irrigated cropland values increased an average of 4.5 percent with a standard deviation of 9.8 percent. The annual percentage change ranged from a negative 16.9 percent to a positive 27.8 percent. Pastureland values grew an average of 5.8 percent annually with a standard deviation of 12.7 percent. The annual percentage change ranged from a negative 18.3 percent to a positive 48.9 percent. The Standard & Poor’s 500 Index yearly closing value showed an average percentage change of 8.1 percent with a standard deviation of 16.9 percent. The yearly percentage change in the S&P ranged from a negative 40.7 percent to a positive 35.0 percent. In summary, the stock market as reflected in the S&P offered a higher overall percentage gain than agricultural land, but also demonstrated more volatility as shown by its standard deviation.
The annual rate of return for non-irrigated cropland using cash rental rates as a proxy for income and subtracting taxes, management fees, insurance and maintenance has averaged 3.5 percent since 1970. The standard deviation of the yearly return to land has been 0.8 percent. The maximum yearly return was 4.7 percent while the low was 1.7 percent. For pastureland, the annual return averaged 2.0 percent with a standard deviation of 0.7 percent. The maximum annual return was 2.8 percent while the low was 0.7 percent. The S&P yearly dividend averaged 3.0 percent of the S&P closing level. The standard deviation was 1.3 percent, the maximum yearly return was 5.4 percent, and the lowest yearly return was 1.2 percent.