News Analysis date published New: 
Friday, January 21, 2011 - 13:00
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Friday, January 21, 2011 - 13:00
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Friday, January 21, 2011 - 13:00

This Little-Known Asset Has Posted Double-Digit Gains for the Past 60 Years

Friday, January 21, 2011 1:00 PM

For the courageous souls willing to jump into stocks in March 2009, it's been a bonanza: The S&P 500 has risen about 90% since then, equating to annual gains of more than 40%. But this widely-held index has been a loser if you go farther back. In the past decade, the S&P 500 is down about 20%. Those kind of neck-snapping gyrations have surely caused lots of indigestion for investors.

Want to find an asset that doesn't behave like a roller-coaster? I think I've found it. It's been an attractive asset for much of the past 10 years and all signs point to continued gains in the decade ahead.

According to a study conducted by Kansas State University, the average annual return on U.S. farmland since 1950, including crop yield and land appreciation, is 11.5% compared to a 12% annualized total return for the stock market. But here's the great thing: the farm returns actually came with about half the volatility of stocks.

Farm prices only slumped three times in the last century: In the 1930s, the 1980s and again in 2008. Despite that 2008 slump, The NCREIF Corn Belt Farmland Index shows a total return of 11.4% from January 1991 to December 2008 (6.75% appreciation plus 4.46% income). That's in keeping with a more recent look by the Chicago Fed. A quarterly survey found that farm land prices rose 10% from a year earlier in the period ended September 2010.
Why farmland will be a hot commodity

Looking ahead, there's no reason to think that farm land won't keep rising in value. The factors behind rising farm land prices include:

  • Rising agricultural yields -- which generate stronger cash flow for each acre of farmed land.
  • A growing shortage of worldwide arable land. According to the Food & Agriculture unit of the United Nations, the amount of arable land per capita worldwide has fallen from 1.2 acres in 1960 to just 0.55 acres today. Only 7% of the Earth's land surface is suitable for cultivation -- the remainder is either too hot, too cold, too salty, too steep or too stony.
  • In the next 40 years, the global population is projected to grow from six billion to nine billion. Meanwhile, in many places, farmland is disappearing. Where I live, in New York's Hudson Valley, a number of apple farms have been replaced by subdivisions.
  • Surging caloric intake in many emerging economies. The consumption of grains and proteins in China, India, Brazil and elsewhere has been on a steady upward trajectory. Barring a global economic crisis, this should keep rising in coming decades.

Global land grab
The rising global population has already led countries and major investment entities to take action. China is spending $5 billion in Africa to snap up fertile plots. With one-fifth of the world's population to feed, but less than 10% of the world's arable land, China has no choice. Oil-rich Gulf States have also gone on a land-buying spree.

Yet despite those efforts, many countries -- including China -- will need to increasingly rely on imported agricultural products.

Data regarding global trade of soybeans, wheat and other crops are hard to obtain, but it's become increasingly clear that Brazil has emerged as the farmer to the world. Right behind Brazil: The United States. According to the U.S. Department of Agriculture, the current fiscal year (which ends in September) is off to a very strong start, and many believe that we're on track for a record year of agricultural exports.


Source: U.S. Dept. of Agriculture

As exports rise, the entire farm economy is becoming stronger. "Very healthy farm income is rippling across the Rural Main street economy," noted economists in a recent Creighton University report, adding that "businesses heavily dependent on the farm economy continue to experience very strong economic conditions."

Farm prices have already risen in the last few years and are surely out of deep bargain territory. But the conditions are ripe for continued moderate gains. And it's important to note that some economists speculate farm prices will simply be flat in 2011, as recent gains are consolidated. So you should have a long-term view when investing in this sector.

Now for how to profit...

Action to Take --> The simplest way to play this asset is to go out and buy up farm land, which can often be had for $3,000 to $5,000 per acre. [I found this web site to be especially useful.]

But to make the most of the investment, you would need to farm the land or rent it out to others. For some, it's easier to find investments that manage the whole process for you.

For example, a company called Agrinuity is an investment firm that sells shares in farm land investments, primarily in the Midwestern United States. Investors seeking to get in on the agricultural boom taking place in Latin America should check out Argentina-based Cresud (Nasdaq: CRESY), which operates 25 massive farms across Argentina and Brazil. But don't expect robust near-term appreciation: According to analysts at Raymond James, shares already reflect a valuation on its farmland than would be valued in the United States on a comparable basis.

If you simply want to play the agriculture boom and would rather not speculate on the value of farm land, the Van Eck Market Vectors Agribusiness ETF (NYSE: MOO) owns a number of ag-related firms around the world. The fund is heavily exposed to farm commodity prices and as a result, fell sharply in 2008 before a recent strong rebound.

Exposure to the farm belt won't yield any quick home runs. But a whole host of factors should help this asset class hold its own for many years to come.

David Sterman does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.