Investors who've never even considered buying a farm are now turning to agriculture as a haven that has provided consistent, strong long-term gains without the volatility of stocks or even other forms of real estate.
But with that newfound popularity comes a new challenge: Making sure investors understand enough about agriculture to make smart decisions. So says Murray Wise, of Illinois-based Murray Wise Associates, a longtime broker, land auction specialist and farmland investor, as well as author of two books on farmland investment.
"When you've had strong returns for a number of years -- as we have in farmland -- investors who lack experience with that asset class are prone to two mistakes. One is to think that they've missed the bus, and it's too late to get in. The other is to assume that recent trends will continue indefinitely," says Wise. "We see both of these in virtually any market, whether it's equities or real estate. Both are rooted in the same problem: Focusing on price trends rather than value."
Investors need to focus on value, not land price trends
That's especially true for investors who are more accustomed to the volatility of stocks, or those who got stung in the real estate bust in recent years, Wise says. "Farmland is an entirely different kind of investment. It doesn't rise and fall with the day's news, like commodities and stocks. And unlike other forms of real estate, it produces products that the world must have. So essentially it has its own set of rules," he adds.
"I can't tell you whether the price of farmland will go up next year. I think we all realize that no asset can continue to rise 18% to 20% indefinitely. But that has little or nothing to do with its value at current prices. And from a value standpoint, there's no doubt that today's prices are well justified," said Wise.
For experienced farmland investors or novices, he offers this advice:
* Think long term. "Farmland is more liquid than a lot of people realize, especially today. But it still should be considered a long term investment. On the other hand, you don't have to worry about the price tanking because of a negative earnings report. It's all about steady growth and consistent, attractive returns."
* Look for value. "The market for farmland, like most others, can be inefficient. Prices have increased 20% or more in Illinois, Indiana and Iowa during the past year. But they're only up% in Michigan and 8% in Wisconsin. There are still a lot of great values out there."
* Don't be afraid to sell. "Even farmland isn't forever. There are situations in which it makes sense to sell -- either to rebalance a portfolio or to assure the inheritance of the next generation, for example. For those, it makes good sense to sell into strength. While we sell at auction as well as in private treaty transactions, we find that an auction tends to create the competition that brings the highest price."
* Understand what you're buying. "While the media's focus right now is on price appreciation, investors need to make sure they are in a position to realize the income streams. That means you need a basic grasp of the various options for leasing the land. In most cases, cash rents are at levels the can provide a steady return of 4%, plus appreciation."
* Get good advice. "This is one investment class in which it really pays to find an adviser or buyer representative who understands the marketplace and can help you find land that suits your investment objectives, as well as one who will assist you with leasing the land."
About Murray Wise Associates LLC: Headquartered in Champaign, Illinois, this firm has additional offices in Florida and Iowa, and is a leading national agricultural real estate marketing and auction company. The company also manages farmland assets for individual clients in Iowa, Minnesota, South Dakota and Nebraska--with an office in Clarion, Iowa.About Murray Wise Capital LLC: Murray Wise Capital LLC is a financial advisory firm providing investment banking and strategic advisory services to companies in the agribusiness industry. The firm offers mergers and acquisitions, capital raising, restructuring and valuation advice to processors, producers, manufacturers and dealers of agriculture-related products and services.