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Investing Fundamentals

September 25, 2019

Farm Investment Bear Markets: What Do They Look Like

While farm investments have proven to be dependable and productive investments over time, we are often asked “what does a downturn look like in farm investing?” It is difficult to identify large downturns in the U.S. farm investing market, with the exception of the early 1980’s downturn (discussed extensively in our whitepaper here). However, the early 1980’s were highly unique given excessive speculation, high levels of debt in the farm system, a grain embargo, and exceptionally high interest rates. Today, we can find a more recent and relevant example of a downturn in farm values in Nebraska.

Nebraska Has Somewhat Unique Problems

Nebraska has seen declining farm prices over the last 5 years, a phenomenon different than most other U.S. states where prices have been steadily increasing. The downturn in Nebraska farm prices may be attributed to several problems, though perhaps an overheated market increase from 2009-2014 is most obvious. During that 5 year period, average per-acre values of Nebraska irrigated farmland increased a staggering 165%, or an average of 22% per year.

For comparison, farmland values in Arkansas (chart below) increased 39%, or an average of 7.7% per year, during the same time period while following a much more consistent pattern.

farmland values in Arkansas (chart below) increased 39%, or an average of 7.7% per year, during the same time period while following a much more consistent pattern.

In addition to what looks like an overheated market in Nebraska leading up to 2014, increasing problems with access to water have affected farm prices in parts of the state. Three of the state’s eight farming regions cited water as a problem in a recent survey conducted by the University of Nebraska-Lincoln. According to that 2019 Nebraska Farm Real Estate Market Survey, “survey participants indicated policies guiding the use of water as a key driver in the value of irrigated properties across these three regions.”

Given that these three regions often rely on pumping underground water for irrigation, and that the water supply is being depleted in many places, this comes as no surprise. As a side note, this is an important part of why we at AcreTrader place so much value on a farm’s access to a long-term, sustainable water supply during our research and underwriting process (example: we have not even considered investing in the three water-impacted regions of Nebraska).

Despite a 5-Year Downturn, Total Investor Returns Are +3.9%

Due to the problems mentioned above, farmland prices in Nebraska are down 17% from their peak in 2014. So, presumably, if you acquired Nebraska farmland at its average price of $7,050 per acre in 2014 and sold it today at the state average of $5,850, you would lose 17% on the value of the land.

However, it is important to note that during that same time, you would have also earned rent from the tenant farmer that totaled $1,472 per acre. Adding up the $5,850 sale price today and the $1,472 in rent implies a total per-acre return to the investor of $7,322. With a purchase price of $7,050 and a total return of $7,322, the total 5-year return would be a positive 3.9%.

Said differently, in the worst farm price downturn in any U.S. state of the last 20 years, the average farm investor would have still made money. That is before accounting for research and underwriting processes that could have helped avoid exposure to some of the state-specific risks.

To be clear, the past is no guarantee of future returns, but the market in Nebraska highlights one of our favorite things about farmland: the investor can make money from both increases in farm values as well as rent from the farmer. In a case where land prices go down, the income from renting the farm can help offset some, or even all of the potential losses.

Note: The information above is not intended as investment advice. Data referenced above is provided by the U.S. Department of Agriculture and The University of Nebraska-Lincoln, with additional calculations and analysis performed by AcreTrader. Past performance is no guarantee of future results. For additional risk disclosures regarding farmland investing and the risks of investing on AcreTrader, please see individual farm offering pages as well as our terms and conditions.