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August 12, 2002

Economist: Farmland trumps stocks as true blue chip investment

WEST LAFAYETTE, Ind. – When it comes to investment options, Wall Street can't pave the way to retirement better than an Indiana crop row.

Since 1990, Hoosier farmland has generated greater returns than stocks within the Standard & Poor's 500 index, said Chris Hurt, Purdue University agricultural economist. In a stock market gyrating wildly as reports of accounting scandals rock corporate America, farmers and others who own farmland should feel vindicated, Hurt said.

"During the 1990s, many Indiana farmers lamented that their retirement funds were tied up in farmland, while their city cousins enjoyed years of stock returns exceeding 20 percent," he said. "But when we look at this with a little bit longer perspective – and not just stopping in 1999 when the stock market looked like a glorious opportunity – it turns out that farmland has done quite well in Indiana relative to other investments and, especially, the stock market."

Hurt compared a $1,000 investment in S&P 500 stocks in 1990 to an identical amount invested the same year in Indiana farmland. Returns covered the nearly 13-year period ending July 31, 2002. Stock earnings were based on annual returns and dividends; farmland earnings were based on annual returns plus land value appreciation, minus certain expenses. Income tax consequences were not subtracted from either set of numbers.

The S&P 500 is a broad-based index of common stocks. It is considered a benchmark for U.S. equity performance.

Hurt found that while average returns by annual percentage growth were slightly higher in the stock market, Indiana farmland came out ahead in total returns. The numerical improbability occurred because the S&P 500 experienced greater annual highs and lows during the period analyzed, while farmland values and returns inched up steadily each year.

"Since 1990 the stock market has had a higher average annual return – about 11.3 percent – but Indiana farmland has had a return of 11 percent," Hurt said.

"What is really interesting is that $1,000 invested in the stock market in 1990 had grown to more than $5,000 by the end of 1999, where farmland and its returns had grown to only about $3,000. Since 1999, however, the stock market has fallen on hard times. Now what we're seeing is that $1,000 invested in farmland in 1990 has accumulated about $3,800 on a pre-tax basis, while the stock value now stands at about $3,300."

By year, the pre-tax value of $1,000 invested in 1990 in S&P 500 stocks and Indiana farmland was:

• 1990 – Farmland, $1,119; stocks, $969.

• 1991 – Stocks, $1,264; farmland, $1,206.

• 1992 – Stocks, $1,361; farmland, $1,297.

• 1993 – Stocks, $1,497; farmland, $1,413.

• 1994 – Farmland, $1,638; stocks, $1,517.

• 1995 – Stocks, $2,087; farmland, $1,847.

• 1996 – Stocks, $2,565; farmland, $2,204.

• 1997 – Stocks, $3,421; farmland, $2,600.

• 1998 – Stocks, $4,398; farmland, $2,924.

• 1999 – Stocks, $5,324; farmland, $2,973.

• 2000 – Stocks, $4,835; farmland, $3,222.

• 2001 – Stocks, $4,256; farmland, $3,498.

• 2002, through July 31 – Farmland, $3,830; stocks, $3,348.

Annual farmland returns between 1990 and July 2002 are divided almost evenly between land value appreciation and revenue generated from farming, Hurt said.

Land values have increased an average of 5.8 percent per year since 1990. Farming returns – measured as the annual cash rent less real estate taxes, and a management fee – has added 5.2 percent annually in the same period.

Farmland values and cash rents are calculated each year in the Purdue Land Values Survey, conducted by Purdue agricultural economist Craig Dobbins.

As farmland returns consistently moved upward, stocks have been less predictable.

"Looking at the 13 years spanning back to 1990, the stock market has had double-digit increases or decreases in 10 of those 13 years," Hurt said. "Unfortunately, three of those years they were double-digit to the downside. On the other hand, farmland values and returns have experienced only about one-fourth the variability in returns as the stock market. Farmland has had a very steady rate of increase, on average, and returns have been relatively stable."

Hurt believes farmland might become a more attractive investment in the years ahead, particularly if the stock market continues to sputter.

"In the stock market there's a lot of uncertainty now. This includes confusion about potential fraud within companies, fraud within the accounting and uncertainty as to the true profits or losses when accounting is straightened out," he said. "That uncertainty has led to lower stock values and is causing some investors to look more seriously at 'tangible assets,' instead of something on paper, like stocks. What is 'tangible'? Things like real estate, farmland, precious metals, collectibles – items people can feel."

Falling interest rates and income protections provided within the 2002 Farm Bill also bolster farmland investments, Hurt said.

"As we see some shifting out of equity markets, there is more interest in bonds or other interest-bearing instruments, like certificates of deposit," he said. "That's causing interest rates to drop. As interest rates go lower, that tends to favor investments that require a lot of debt capital, such as land and other real estate.

"Another thing favoring farmland as an investment in the next several years is the new agricultural act. It's a six-year act that runs from the 2002 crop to the 2007 crop. The bill substantially increases the safety net of farmer returns. That is, it gives a greater assurance that farmland will have a positive return. This government program, in combination with crop insurance, has helped stabilize and reduce the total risk of owning farmland."

The farm bill earmarks $180 billion in spending over a 10-year period. The commodities title provides direct payments and other subsidies to the nation's food, fiber and dairy producers. Title I budgets $49 billion more for commodities than the 1996 Farm Bill.

Writer: Steve Leer, (765) 494-8415, sleer@purdue.edu

Sources: Chris Hurt, (765) 494-4273, hurtc@purdue.edu

Craig Dobbins, (765) 494-9041, cdobbins@purdue.edu

Ag Communications: (765) 494-2722; Beth Forbes, bforbes@aes.purdue.edu; http://www.agriculture.purdue.edu/AgComm/public/agnews/

Related Web site:
Purdue University Department of Agricultural Economics

Purdue News Service: (765) 494-2096; purduenews@purdue.edu


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