So the question remains. Is Oklahoma farmland or the stock market a better investment? It is a complicated question and one for which there is no one right answer. As mentioned previously, the timing of the initial purchase, subsequent purchases, and reinvestments of returns influence the returns to either stock or farmland investments. Several assumptions were made in this study. Real estate taxes, a management fee, insurance and maintenance were subtracted from the return to land (represented by cash rent) and were the only ownership costs assumed for land. Other costs vary with individual circumstances. This study also assumed no transaction costs associated with either the purchase of land or the purchase of stocks. Finally, this study assumed average performance for land values, rents and the stock market. Deviations from average performance would produce different results.
The majority of land is purchased by existing farmers. They purchase the land for a variety of reasons including factors beyond traditional investment theory. Farmland has been a competitive investment compared to the stock market over the past 20 years (Figure 2).
What will happen to the value of farmland over the next several years is difficult to predict. Agricultural land represents an income-producing asset and its value is essentially driven by current and expected earnings. Agricultural land values have risen more quickly than rents in recent years. In the short term, an increase in both are likely to continue given a strong cattle economy, high grain prices, low interest rates, and continued nonfarm investor interest. In the longer term however, changing market conditions, government policies and/or interest rate increases could adversely impact values and earnings.
The performance of the stock market over the next several years is also not clear. The S&P 500 used as a benchmark includes companies with significant global investments and earnings. Thus, economic conditions throughout the world matter.
Farmland and the stock market are different types of investments and assets. This simple comparison was based strictly on averages. Oklahoma farmland has outperformed the S&P in some periods since 1970, but not all years. Yes, timing is everything.
Roger Sahs and Damona Doye , OSU Assistant Extension Specialist, and Regents Professor and Extension Economist
Ag Decision Maker, Iowa State University, http://www.extension.iastate.edu/agdm
Dr. Robert Shiller Stock Market Data, http://www.econ.yale.edu/~shiller/data.htm
OSU Agricultural Land Value Website: www.agecon.okstate.edu/oklandvalues
USDA Land Values 2012 Summary, http://usda.mannlib.cornell.edu/MannUsda/viewDocumentInfo.do?documentID=1446