Farming Magazine - June, 2012
Opinion: Buying the Farm
There are no gallows anymore (at least not in western countries), but "gallows humor" as a language arts form is still with us, reflecting the human tendency to try to make light of tough times. In post-World War II farming, during the decades of farming at a loss after the profitable ear years and a few post-ear years had gone by, the story of the farmer inheriting a million dollars surfaced. "What will you do now?" asked the breathless reporter. "Keep on farmin' until it's all gone" was the supposed answer. Before that, "buying the farm" described combat fatality, one explanation being that the death benefit to parents back home enabled the mortgage to be paid off as mere crop production never could. Such stories shelter a kernel of truth. For most of recent American history - exceptions: a few years around World War I, a few years around World War II and the last couple of years for some commodities and not others - farmland ownership hasn't been a positive investment generating a positive return. When the actual commodity crop is worth less than the cost of production, in classical economic theory, the residual value of the cropland itself ought to be zero. It never is.
That's in sharp contrast to urban real estate, which goes to zero if, for whatever reason, it can't pay its costs and generate a reasonable profit (a little NFO slogan lingo, there) as the South Bronx of New York City a few decades back, and Detroit and Youngstown, Ohio, now illustrate via owner-abandonment practices. Until recently, you could buy an abandoned 19th-century row house in downtown Baltimore, complete with polished marble front stoop, from City Hall for a dollar if you pledged to move in, restore it and start paying property taxes. It's also in contrast to farmland values in the 18th and 19th centuries, when raw land on the frontier was, for practical purposes, free, and developed farmland was sure to be profitable because of far higher (as a percent of income) urban food prices and usually higher (sometimes remarkably so, like pre-Civil War cotton) commodity prices for domestic or export markets. Even today, a just-published USDA/ERS study (Trends in U.S. Farmland Values and Ownership, EIB-92, February 2012) reports with text and chart on page 10 that "during 2004-08, farmland values were not justified based on farm earnings alone." A chart on page 11 shows the same economic facts back to 1998. Before that, in the mid-'70s a soft-cover chart-filled book entitled "1961-1970: The Farmers' Worst Nine Years" recited a similar, but not yet negative, pattern. On page 50, author Frank LeRoux offers a table showing that return on farm investment was down to 6.6 percent in 1969 (it had been at a 12.4 percent average in the World War II and post-war years, even better than the 10 percent or so guaranteed then and now by state public service boards to utilities), and your humble Scribe wonders what he would be saying now. A USDA dairy study published last year showed national average negative returns of -$7.50 per hundredweight in 2009 and -$3 per hundredweight in 2010, and the only positive regional return over costs was in the "Prairie Gateway" region for 2010 only.
Meanwhile, a "Weekend Investor" section in the March 3-4, 2012, Wall Street Journal describes how investment houses are urging their clients to "buy the farm," or as they phrase it, "invest in farmland," for IRAs, pensions and other such passive income instruments. Just recently, a major pension player, CalPers, announced that it expects a 7.5 percent return annually from a range of ag targets including farmland, forests, beef and fish. Just like the Merrill Lynch Farmland Trust in the '70s and the TIAA-CREF pension fund ever since. But only a few days earlier Iowa State University had published an extremely detailed analysis of corn silage production for a 50-acre Corn Belt plot producing 24 tons per acre. The final number: $39.87 per ton. If you sell for that price, you're breaking even; no 7.5 percent from land used for corn silage. The costs include a "cash rent equivalent" of $258 per acre; the authors don't explain the difference between that total ownership cost number and actual 2010 cropland rents, which were $102 per acre on average. Assuming the $258 is valid, if your ownership cost exceeds that number you'd be in the red; similarly if your production is less than 24 tons per acre. The hayandfor website says the average national corn silage price is $20 per ton, about half the actual production cost. All of which raises the question: Why is farmland worth even $2,000 per acre on average and cropland even more at $2,700?
Not because it's disappearing under pavement, as activists like the American Farmland Trust like to claim: "If you don't send us money to lobby for farmland preservation, your food prices will rise." Land in harvestable cropland has shrunk from 319 million acres in 1997 to 310 million in 2007, the USDA reported in its March 29 2012 U.S. Fact Sheet publication, while farmland in conservation (non-use) practices rose from 32 million acres to 39 million acres. Total farm acreage has similarly shrunk from 955 million acres to 922 million acres. Such yield gains as the present 160 bushels per acre for corn (40 in the post-World War II years) explain the underlying economics.
But maybe because of the apparent logic of the Will Rogers Depression-era quote on the subject: "Buy land. They ain't making any more of it." Some researchers claim it was Mark Twain a generation earlier, but no matter, the notion that there might be an impending shortage of farmland as the population grows and the planet doesn't has deep Malthusian roots. If the notion is sufficiently widespread, buyers will surface and prices will rise, irrespective of whether the land is presently a profitable investment or not. And irrespective of whether the commodity is intrinsically valuable or not: think the Dutch Tulip bulb craze of 1634-37: the investing population bid up both the crop and the croplands, until, inevitably, the first major sell-at-the-top expert sent all the followers stampeding for the exits. Will Corn Belt acres eventually have the zero investor appeal of South Bronx rubble-filled tenement lots or Enron stock, both of which went from real value to real non-value? Not for a long time, farmland investors believe. Which explains why farmland has gone from $200 per acre in 1970 to $2,000 per acre today, and 1970s $200, inflation-adjusted for Consumer Price Index increases, would be equal to only $1,120 today. Today's investors are buying the farm, not for wartime analogy reasons, and not for expected production-profit, but for capital gains reasons: buy low now, sell higher later. If it's been going up, they figure it will keep on going up. Whether, in the interim, its crops are profitable or not matters not to them. Part of that calculus (humble scribe guess) is based on urbanization expectation; the reasonable (based on both demographic numbers and urban-consumer behaviors, both showing clear century-long patterns) expectation that farmland conversion for housing and related commerce and industry will increase in carefully selected locations, and thereby change the underlying land value from the pitiful $2,000 per acre for, say, corn, to 10 times that amount for exurban large-lot housing and a hundred times that amount for the academies, the research labs, the manufacturing centers, and, of course, the shopping malls and governance campuses that will spring up as an urban population goes more rural.
That's why the first American "Donald Trump" chose the rural farmland of 19th century Manhattan Island to buy up, in anticipation (correct as events showed) of urbanization moving steadily north from New York City's original Wall Street boundary. Eventual first U.S. multimillionaire John Jacob Astor (1763-1848) may have made his first small fortune in furs, but he made the later big one in just the sort of real estate calculations now motivating those nonfarmers who already own, but don't work, 29 percent of U.S. farmland (the stat offered in the Summary of the ERS/USDA study) because they expect that their investment will eventually pay off, not by growing crops, but by marketing to the fastest-growing (pun intended) trend in exurban land use, which is exactly the pattern of low-density development despised by Smart Growth enthusiasts (whose goals are purportedly buried deep inside UN Agenda 21 policies, a whole 'nother subject for which there's insufficient room in these column-inches) but now embraced by a major sector of the middle and upper-middle-class urban population. And, if neither this preference for de-urbanization theory nor the Will Rogers warning seems persuasive, there's a third one: When governments print money, prudent people move their savings to such alternatives as seem safe: gold, silver and land.
The proof of printing shows up strikingly in the latest hockey stick graph line getting ink in the popular press: not the Global Warming climate graph, discredited when further study showed its authors had massaged the stats to eliminate the Early Medieval Warming Period when the Vikings were growing wheat on Greenland, but the Federal Reserve currency creation graph, showing zero printing from 2000 to 2008 and almost $2 trillion since. Professional economists are writing lots of articles showing how gold and silver have the same purchasing power per some commodity units - energy, for example - as they did back when the Fed went into operation in 1913, and similarly showing how in the last 99 years its "discretionary" money printing has devalued the dollar by 98 percent. Maybe farmland is up, not because it's a profitable investment in the classical sense, but because buyers deem it potentially less unprofitable than, say, cash. For these savers and investors, "buying the farm" in the literal sense beats watching their nest eggs "buy the farm" in the military-figurative sense, which is what's already happening with once-considered-safe investments put into that other form of Treasury paper, interest-bearing bonds and notes. Humble scribe guess: If politicians heed the recommendations of such professional economists as John Taylor (he advocates placing the Fed printing presses on a strict money supply formula discipline, and ending Fed "discretion," the price of farmland would soon, like any nonfarm asset, reflect the return on investment to the owner. Question: Would those who actually farm the land prefer to make their living from a profitable commodity sale price or, as USDA recommended in the '80s, be equally pleased with zero or negative return on production but seemingly nice inflationary gains on land values? You decide.
The author is an architect and former farmer.