Analysis Land

Investors lose interest in agricultural land

May 30, 2024 - Jurphaas Lugtenburg

The market of agricultural land is traditionally the domain of farmers, a select group of wealthy (institutional) investors/asset managers, and the government. Investors had little interest in land partly due to the significant barriers to investing in land. This is not only the case in the Netherlands but also in the US. The credit crisis of 2007/08 turned the financial world upside down and also changed investors' attitudes towards land, as stated by Steve Bruere, president of Peoples Company (investment company specializing in land), and Ailie C. Elmore from the University of Illinois in a whitepaper.

Until 2007, Wall Street and other stock exchanges had a huge appeal to investors. For portfolio diversification, investors sought refuge in bonds, gold, silver, commodities, and commercial real estate. Agricultural land was considered boring and something for farmers according to many investors.

The banking crisis disrupted the financial markets. The value of stocks plummeted, and stock indexes dropped by tens of percent. To stimulate the economy, central banks lowered interest rates. In the twenty years before 2007, the average annual return on one-, five-, and ten-year US government bonds was 7.0%, 7.9%, and 8.2%, respectively. In 2008, that return decreased to 1.8%, 2.8%, and 3.7%, with the prospect of rates not rising quickly in the coming years. Bonds are traditionally a safer haven for investors when stock markets are turbulent. In search of secure returns, investors discovered agricultural land. The agricultural sector remained relatively unscathed, and land prices rose.

In the period from 2010 to 2012, several funds specializing in agricultural land were established in America. Land remains a difficult market for investors to understand. Unlike stocks or bonds, there is no central exchange, there are significant differences in the value of parcels, and there is relatively little trading. In the US, land mobility, like in the Netherlands, is below 2%. Therefore, jumping in quickly is not an option, and a certain knowledge of the agricultural sector is required to assess the land.

In the past fifteen years, American land funds have shown a stable return. According to the National Council of Real Estate Investment Fiduciaries Farmland Index, the average annual return from 2008 to 2023 was 9.9%. A good starting point for the funds to expand further, one might think. However, according to the whitepaper, this is not the case. In fact, some funds are liquidating their positions and do not want to reinvest. Rising rates to combat inflation make it difficult and expensive for funds to attract capital. With rising rates, bond yields also increase. The lack of return on bonds was precisely a reason for investors to invest in land.

Farm Crisis
It has been shown in the past that land prices can also decline. The 1970s were a period of high inflation but also glory days for American farmers. A highlight may have been the $750 million grain deal that then-President Nixon made with Brezhnev, the leader of the Soviet Union. After the failed agricultural reforms of Khrushchev and a period of drought, Brezhnev turned to the US to feed the population of the USSR. Grain prices in the US rose, and as a result, land prices also increased. In 1972, land in Iowa averaged $440 per acre. This rose to $2,124 per acre in 1981. A few years later, the Soviet Union invaded Afghanistan, and Carter imposed a sanctions package that included grain. The consequences were disastrous for American agriculture, ultimately affecting land prices. The average price dropped back to $822 per acre in 1987.

Jurphaas Lugtenburg

Jurphaas Lugtenburg is a market specialist in onions, carrots, and commodities such as wheat, corn, and soybeans at DCA Market Intelligence. He combines his degree in business administration with a passion for farming.