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Land Values Hold
Investors and consumers are feeling the effects of tariffs, and the buzz of a recession looms. Despite the uncertainty, investors can unearth opportunities below the surface, says Steve Bruere, president of the land brokerage and management firm, Peoples Company, Clive, Iowa. “Smart money in the investment market is shifting to American farmland,” he says.
As the U.S. economy has become unsettled by the trade war with China, investors have begun to move money from the stock market into the less risky bond market, specifically into long-term bonds. Over the past 20 years, long-term (10-year) government bonds have yielded returns from 1.5% to 6.66%, averaging 3.5%.
Typically, longer maturity bonds have higher yields; investors require more compensation to hold a note or bond for a longer period of time due to inflation risk and other market uncertainties. However, with the increasing demand for safer investment options, long-term bond yields have dropped. In August, the 10-year Treasury note yield fell below the two-year yield for the first time since June 2007. A similar inversion of the two-year/10-year yield curve has preceded each of the U.S.’s last seven economic recessions. Understandably, the current inverted yield curve, combined with the trade war, is deepening investor concerns over a potential recession.
While an inverted yield curve can signal a slowing economy, investors must not be fearful but, rather, become more analytical and visionary, Bruere says. “The current economy and interest rate climate actually provide favorable conditions for borrowing, expansion, and appreciation.”
While the bond market offers reliable returns, current yields are not likely to enable many investors to achieve their investment goals, he says. American farmland is another option. “Farmland is an asset class full of robust opportunities and is becoming an increasingly popular investment choice,” Bruere says, “due to strong global demand for food, as well as solar and wind energy.”
Despite dampened commodity prices, conventional farmland cap rates are holding steady at 3%, he explains. That is a wide margin over current 10-year bond yields held below 2% since the beginning of August. Even more appealing, organic farmland has a competitive cap rate of at least 5%. “Both conventional and organic operations have significant room for upside and higher returns,” Bruere says.
Throughout the past 20 years, U.S. farmland has nearly tripled in value. In 1998, it averaged $1,000 per acre. The 2018 average was over $3,000 per acre. Since 2014, land prices have plateaued; however, farmland continues to hold its value despite fluctuations in the economy. Advances in farming practices, technology, and genetics make farmland appreciation real, Bruere says.
Farmland investment provides capital security at a low level of risk, offering strong annualized returns with low income volatility, he says. “Farmland also serves as an effective inflation hedge and offers many tax planning opportunities.”
Once trade agreements are reached with China, U.S. commodity prices are expected to rise, leading to further appreciation in farmland values, Bruere says. “American farmland is a unique asset class that investors need to approach in a bull-rush manner,” he says. It can provide returns from crop income plus appreciation in the value of land. It has long been considered an attractive long-term investment. “There has been no better time in history to buy farmland than right now,” Bruere says.