Better Investment – Farmland or Stocks?

As you can probably guess this headline that the answer is – “It Depends”.  Iowa State University economist Mike Duffy ran some numbers comparing the return from owning farmland to owning stocks over certain time frames.

Returns are comprised of two components:

1. Yearly return – Cash dividends on stocks and cash rents (or the equivalent on farmland), and
2. Change in market values

Mr. Duffy assumed that a farmer invested in land on January 1, 1960 paid $1,000 or the equivalent of 3.83 acres.  He also assumed a farmer bought 17.60 shares of the S & P 500.  The farmer then took his net cash return (after 7% for management fees and 6% for taxes and insurance) and reinvested it in more land each year.  At the end of 2009, the farmer would have owned 32.87 acres worth about $143,672.  He would have owned about 75.58 shares of the S & P 500 worth about $83,805.  The land outdid the stocks by about 72%.

However, Mr. Duffy then redid the analysis assuming purchase of farmland on January 1, 1980 (at almost the last farmland value peak).  In the scenario, the farm would have only grown to a total value of $8,314 whereas stocks would have grown to $17,365.  The land would only be worth about 48% of the stocks.

What will the next 20 or 40 years bring.  With the high value base of farmland and the lower base of common stocks, it may be hard for farmland to outdo stocks, but it may be more rewarding to own the land than a piece of paper.

For the article, click here.