What does U.S. farmland value have to do with the price of grain in China? As it turns out, a lot. The exponential increase of grain consumption in that country and others in Southeast Asia is one driver of U.S. farmland value.

“Everyone wants to talk about ethanol and biofuels when it comes to drivers of global agriculture and farmland values, when they're not the major part of the story,” says Murray Wise, CEO and chairman of Westchester Group, an asset firm involved in farm brokerage and management. “The story is the growth in food and protein consumption in Southeast Asia — it's beyond one's comprehension.”

As emerging countries' populations and incomes increase, more people are adding meat and vegetable oil to their daily diets. In fact, according to Wise, China's caloric intake of soybean oil food use consumption has grown 50-fold from 0.2 million metric tons (mmt) in 1970 to 10 mmt in 2008. A similar, dramatic increase has been seen in India, and in China's caloric intake of beef and veal consumption.

Considering it takes nearly 3 lbs. of grain to produce 1 lb. of beef, it's easy to see the correlation between increased demand for grain used to feed livestock and farmland value.

“Although there was a slight drop in average value this year, the current level of farmland prices is the product of more than two decades of consistent growth,” says Wise. “That growth is a result of growing demand for food and fiber, in turn a result of growing populations and improving incomes around the world.”

Other positive factors affecting farmland values include low interest rates, high yields, favorable grain prices and limited availability of land for sale, according to Mike Duffy, Iowa State University (ISU) Extension economist.

Conversely, high input costs, decreased profitability, a weak economy, livestock losses and the always-unpredictable weather can have a negative effect on farmland prices.

In his 23rd year of conducting an annual survey of Iowa farmland values, Duffy found that the average value of an acre of Iowa farmland declined in 2009 for the first time in a decade, but just by 2.2%.

“It's not exactly good news when your assets decrease in value, but the decrease was less than I had anticipated,” Duffy says. “High-quality land stayed steady; lower-quality land is relatively stable. This seems more like a temporary blip. Potential is more in line for an upswing, but we'll just have to wait and see what happens with agriculture and overall economy.”

COMPARE LAND TO STOCKS

The economy shows that farmland is still a good investment compared to the stock market. The annual return for farmland comes in at just more than 12%, well above the annual return for corporate bonds, Standard & Poor's Index (S&P) and other stocks (Fig. 1, left).

ISU's Duffy recently studied which was a better investment, the stock market or Iowa farmland. He compared and contrasted the returns to farmland and the composite value of the stock market as measured by S&P, since 1960.

The analysis assumed $1,000 was invested in each alternative at the end of each year, and that the net land rent or the dividend earned in any year would be reinvested in the land or the stock market. The amount of land or stock purchased depended on the existing value at the time, and the process was repeated for each year in the analysis.

Land taxes, a management fee, insurance and maintenance costs associated with land ownership were figured, while there was no ownership cost for stocks.

The yearly return to land even after the ownership costs has averaged 4.68% of land values since 1960. The S&P yearly dividend averaged 3.2%.

“After all the calculations, the value of the stock market investment would be only 58% of the value of the land investment,” Duffy says. “For the most part, land has shown higher returns over the past 49 years.” (Fig. 2, right)

(In 1960 $1,000 would have purchased 3.83 acres or 17.6 shares of the S&P. An investor at the end of 2009 would have 32.87 acres worth approximately $143,672; or they would have 75.58 shares of the S&P index, worth approximately $83,805, or 58% of the value of the land investment.)

Duffy cautions that future farmland values are difficult to predict. “While the value of land is determined by its income-earning potential, returns will be influenced by oil prices, crop yields, costs of production, economic recovery and budget deficit, alternative biomass sources and a host of other major issues.”