Why is farmland a good investment?
A recent United States Department of Agriculture report provides insight into the rise in “the value of all land and buildings on farms that averaged $2,350 per acre in 2011, up 6.8 percent from 2010.” As with all real estate, not all values are up. In Iowa, the per acre value of land and buildings and cropland is up 24.4% and 23.9% respectively, over 2010. In Alabama, the per acre farmland and buildings and cropland is down 2.4% and 2.1% respectively over 2010.
Yields on farmland are improving. The Standard & Poor's 500-benchmark index's average annual return was 11.8 percent between 1950-2008, while the return on farmland with capital appreciation and current yield was 11.6 percent per Western Farm Press.
Low interest rates, world demand for food commodities of corn, soybeans and wheat, ethanol mandate and a reduced supply of available farmland for sale are affecting the upward pressure on farmland prices. For the next two years, the Federal Reserve will keep interest rates low and the possibility of world demand diminishing for grain, wheat and soybeans is unlikely, fueling the demand for farmland.
Individuals and families seeking stable long-term yields may shift their focus from owning real estate such as single tenant triple net leases, tenants in common and commercial properties to timberland and farmland. Portfolio adjustments can be accomplished without incurring the payment of capital gains taxes through a strategy known as 1031 tax deferred exchanges. Both real estate and timber REITs use 1031 exchanges to adjust properties under management by selling and replacing with higher yielding properties.
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