Farmland Investment Returns

Transcription

1 Farmland Investment Returns Farmland Value and Leasing Conference: How will Markets and the Drought affect Land Prices and Rents? November 7, 2012 Decatur Conference Center Bruce J. Sherrick University of Illinois, Urbana-Champaign

2 Farmland Returns... setup Recent high relative returns, price increases Concerns about potential bubble, drought, prices, farm policy (or absence), effect of the day concerns Elevated interest by institutional investors, funds Elevated interest by traditional investors, individuals Elevated interest by current owners in understanding performance relative to alternatives Operator returns versus owner, how to separate Farmland as an investment Conceptually simple to assess, difficult to implement Equity Puzzle important to solve Returns Indexing issues complicated with annual returns and heterogeneity in type/location.

3 Historic Views on Farmland.. We have two great sources of profit in farming: first, rise in the value of the land; and second, profit on the production of farm crops. The first has been the chief source. Already it is difficult or impossible, over much of the country for young (farmers) to become landowners. The area of desirable farmland attainable is comparatively small. The number and percentage of tenant farmers must certainly increase. - George Morrow, 1886

4 Balance Sheet of Ag Sector ($millions, except ratios - source ERS-USDA) Farm Assets 278, , ,609 1,203,215 2,179,669 Real Estate 202, , , ,428 1,841,672 Non Real Estate 76, , , , ,997 Farm Debt 48, , , , ,859 Real Estate 27,506 89,692 74,732 91, ,262 Non Real Estate 21,247 77,131 63,230 86, ,596 Equity 230, , ,647 1,025,578 1,932,811 Selected Indicators Debt/Equity 21.2% 20.4% 19.6% 17.3% 12.8% Debt/Assets 17.5% 17.0% 16.4% 14.8% 11.3% Real Estate/Assets 72.6% 79.6% 73.7% 78.7% 84.5% Real Estate/Equity 88.0% 95.9% 88.1% 92.3% 95.3% Real Estate D to Total D 56.4% 53.8% 54.2% 51.3% 55.2%

5 Farmland values the story begins

6 Farmland Value vs. Income $6,000 $300 Price ($/Acre) $5,000 $4,000 $3,000 $2,000 Illinois Indiana ILRent INRent $250 $200 $150 $100 Net Cash return/acre $1,000 $50 $0 $ Source: USDA ERS

7 Comparison to Major Asset Classes Table 1. Asset Return Characteristics Annual Ave. Standard Coefficient Annual Ave. Standard Coefficient Return Deviation of Variation Return Deviation of Variation Asset/Index Illinois 10.63% 9.88% % 4.93% US Ave % 6.81% % 3.44% Dow Jones 6.49% 15.92% % 15.68% EUROPE 6.05% 20.90% % 21.89% EAFE 6.34% 21.39% % 21.62% Gold 8.98% 23.04% % 13.13% All REITS 8.81% 21.08% % 20.27% TBSM3M 5.40% 3.06% % 2.05% TCM10Y 7.10% 2.65% % 1.52% BBALibor 4.68% 2.44% % 2.19% AAA 8.15% 2.31% % 1.26% BAA 9.26% 2.54% % 1.18% 0.15 CP3M 3.09% 2.12% % 2.12% CPI 4.27% 2.84% % 1.13% PPI 4.06% 4.89% % 3.92% 1.513

8 Returns measurement issues Measuring returns on assets with different income cycles have to standardize time. Indexing vs. holding in whole shares and the denominator problem (esp. as fund size changes) Measures of variability depend on time smoothing and holding periods used. Holding period critical to determine very different convergence rates. Transactions costs may differ by class.

9 Investment Performance IL example Correlation with Illinois returns, 1970 to 2011

10 Investment Performance IL example

11 Investment Performance IL example

12 Investment Performance holding period issues and comparisons of random statistics: Farmland (use live version )

13 Investment Performance IL example (use live version - note the impact on sample period stats)

14 Investment Performance Equities (use live version here and roll through assets

15 Investment Performance Equities

16 Investment Performance All REITS (use live version here and roll through assets

17 Investment Performance All REITS

18 Investment Performance E-V set (use live version here and roll through time note how these depend on sample period)

19 Investment Performance EV frontier

20 Does the Market make sense

21 Converted to Values

22 Yield Curve and Cap rate issues

23 Land Value by Rent and Net Cap Rate 20,000 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2, Rent200 Rent300 Rent400 % Value Change by Cap change Sensitivity

24 Final Thoughts.. Low sector debt, land-concentrated equity, difficult to use sales data to determine values more broadly Risk management crop insurance far more critical than other government programs High transactions costs, thin markets, funds emerging that may help. Capitalization rate issues: what is the exit strategy of the Fed that does not involve inflation or low productivity gains? Low grain stocks current price regimes not necessarily equilibrium Rents have not caught up with values, chicken and egg problem in most fundamental form.

25 Discussion/Questions Thanks