Figure 1 shows the return to $1,000 invested in 1970 for all three investments. At that time, $1,000 would have purchased 3.89 acres of cropland, 7.08 acres of pastureland or 11.1 shares of the S&P. Using the assumptions above, an investor at mid-year 2012 would have 15.31 cropland acres worth $21,285, 15.62 pasture acres worth $18,078 or 36.49 shares of the Standard & Poor’s worth approximately $49,270. In other words, the value in either farmland category would be less than half the value of the S&P investment. Note the dramatic swings in the S&P since 1999 in contrast to the steady climb in farmland values.
However, timing is everything. A starting point other than 1970 would lead to different results. The initial purchase date and subsequent purchases based on reinvestment of returns are important and realistically, farmland does not lend itself readily to reinvestments similar to stocks.
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Figure 2 shows a comparison of the returns through June 2012 based on alternative years for the initial investment using the same methodology shown in Figure 1 (buy, hold or reinvest as income allows). It represents returns to Oklahoma farmland as a percent of the returns to the S&P. Values in excess of 100 percent correspond to farmland with a higher value and conversely, if the value is below 100 percent, then the S&P would have a higher value for the initial $1000 investment made in that year. For example, an initial investment in farmland beginning in 1970 as shown in Figure 1 would have returned less than half of the stock market.
Figure 2 demonstrates that the timing of the investment makes all the difference in which appears to be a better investment. A decision to invest in agricultural real estate would have yielded a higher value in just about every year from 1991 through 2011 (the late-2000s recession being an exception). Looking back, agricultural land values in Oklahoma began their rapid rise in mid-1970s and peaked in 1981. After years of devaluation during the 1980s, land values began a slow but steady rise in the 1990s. Oklahoma farmland and the S&P have offered roughly equal returns on their investment since 2009. Given the recent rapid increase in farmland values, this result may not be intuitive. But remember that despite healthy farmland value increases, farmland rents in Oklahoma have not kept pace resulting in declining rates of return. At the same time, investors buying into the stock market have seen substantial appreciation since the late 2000’s recession with very competitive returns. It will be interesting to see what this chart will look like in 20 years relative to recent economic conditions.