Whole Farm > Land Values > Investment Analysis
July 2022
Comparing the stock market and Iowa land values: A question of timing
This article examines which is a better investment - the stock market or farmland. It is an update of earlier comparisons.
Iowa farmland and the stock market have recently reached record highs. On January 3, 2022, the S&P 500 closed at a record 4,796. It had reached an inter-day high of over 4,800. Since its high in January, the S&P has shown a downward trend, closing at 4,018 on June 9, 2022.
Iowa farmland value has also posted a record high. The Iowa State University Land Value Survey, reported as of November 1, 2021, the average land value was a record $9,751 per acre. This represented a 29% increase for the year. Several surveys since November have shown land values continue to increase. The May AgLetter from the Federal Reserve Bank of Chicago reported Iowa land values increased 3% in the first quarter of 2022 and 28% from April 2021 to April 2022.
There are numerous reasons for the increases in both markets. Higher commodity prices, higher returns, low interest rates and other factors all contribute to the records. The recent records raise the question of which is a better investment, Iowa farmland or the stock market. Additionally, with the highest inflation levels in four decades and continuing global economic and political uncertainty, the question of which is a better investment brings renewed interest.
To examine the impact of recent changes and an uncertain future, this article update earlier versions comparing farmland and stock market investments. Our intention is to determine if record high values, a world-wide pandemic, the Russian invasion of the Ukraine, climate change and a host of other factors may alter previous conclusions.
Background
The returns to land or stock shares are composed of two parts. The first is capital gains or the increase in value. Obviously, this also could be a capital loss if values decrease. The second component is yearly returns.
Owning land has an unavoidable annual ownership cost not associated with stocks. Property taxes must be paid and should be included in a comparison of owning stocks or farmland. Additionally, if farmland is held as an investment and not by an owner-operator, there could be a professional farm manager involved and the fee for this service would have to be considered. There is also a need for some maintenance and insurance with farmland not associated with owning stocks.
The data used for this analysis comes from various sources. The Iowa average land values and rental rates come from USDA National Agricultural Statistics Service (NASS) June Area Survey. The average land tax per acre is calculated using data from USDA Economic Research Service (ERS) State-Level Farm Income Statements data, from which taxes per acre were calculated as the yearly Iowa farm real estate taxes and fees paid divided by the total farmland acres for that year. The 2022 values are not available yet, so we assumed a 15% increase from 2021 land value and 10% cash rent based on the new price forecasts from the 2022 Soil Management Land Valuation (SMLV) conference and the most recent 2022 ISU Cash Rent Survey.
The value used for the stock market is the composite value of the S&P 500 Index average in each June, and the June dividend value for each year is used. These data for 1950 to 2022 were obtained on the website of Dr. Robert J. Shiller, a Nobel-winning economist at Yale University. The June 2022 stock price and dividend were not available at the time of this writing, and the May 2022 S&P 500 Index and March 2022 dividend were used as proxy.
A few assumptions are necessary to determine which provides the better investment. It is assumed $1,000 is invested in each alternative at the end of the year before the analysis begins. The amount of land or stock purchased will depend on the existing value. For example, in 1950 the average farmland value in Iowa was $161 per acre. So, for $1,000, 6.21 acres could have been purchased shortly after June 1950.
A second assumption is that all the net land rent or the dividend earned in any year will be reinvested in the land or the stock market. This will increase the number of units held. To continue the example above, assume the 6.21 acres bought in 1950 could charge rent at the current (1951) levels. The average Iowa farmland rent in 1951 was $12.37 per acre. Average farmland property taxes in 1951 were calculated to be $2.31 per acre. Subtracting taxes, a 7% of gross rent management fee and a 6% of gross rent charge for insurance and maintenance, the net return per acre in 1951 was $8.45.
Recall that the $1,000 investment has been turned into 6.21 acres of Iowa farmland, which would generate a total of $52.47 in net rent for the investor ($8.45 × 6.21 acres). In 1951, the average land value was $188 per acre. If the entire net return were invested back into land, .28 acres could have been purchased ($52.47 / $188 = .29). So, at the end of 1951 the investor would have 6.49 acres worth $1,066 ($1,220 = (6.21 + .28) × 188). This process is repeated each year in the analysis.
The June 1950 S&P share price was $18.74. This means 53.36 shares could have been purchased for $1,000. The June 1951 dividend was $1.56 per share. This means an additional 4.11 shares and a value of $1,233 at the end of 1951.
Land taxes, a management fee, insurance, and maintenance are the only ownership costs considered for land. There is no ownership cost assumed for stocks. No transactions costs or other costs are considered in this analysis.
The annual percentage changes since 1950 in the S&P and Iowa land values reflect considerable yearly variation in both investments. The nominal Iowa land values changed an average of 6.2% with a standard deviation of 10.6%. Yearly percentage change for land ranged from a negative 28.1% to a positive 36.8%. Comparatively, the S&P’s yearly closing value showed an average percentage change of 9.2% with a standard deviation of 15.3%. The yearly percentage change in the S&P ranged from a negative 40.0% to a positive 51.7%. Out of the 73 years from 1950 to 2022, Iowa land values saw an increase 55 times, while the S&P increased 54 times.
The yearly return to land after taxes, management fee, and insurance and maintenance has averaged 4.9% of land values since 1950. The standard deviation of the yearly return to land has been 1.3%. The maximum yearly return was 7.0% while the low was 2.1% in 2022. The S&P yearly June dividend has averaged 3.1% of the S&P closing level from 1950 to 2022. The standard deviation was 1.4%, the maximum yearly return was 7.2%, and the lowest yearly return was 1.1% over the same time period.
Analysis
Figure 1 shows the return to $1,000 invested in 1950. At that time, $1,000 would have purchased 6.21 acres or 53.36 shares of the S&P. Using the assumptions discussed previously, an investor in June 2022 would have 160.6 acres worth $1,429,899. Alternatively, they would have 473.3 shares of the S&P worth $1,976,333. In other words, the value of the S&P investment would be 38% above the value of the land investment in 2022.
Figure 1 reveals the ups and downs of the stock and land markets over a 73-year span. In particular, the S&P 500 returned more following the 1980s farm crisis, but experienced a significant dip in the late 1990s - early 2000s due to the Asian financial crisis and the dotcom bubble. The significant uptake in the investment value for farmland from 2004-2013 also clearly revealed the dramatic increase in Iowa land values since the mid-2000s. The past five years have witnessed the surge in the stock market alongside the recovery of the general economy, while the land market has increased rapidly in the past two years. The return to the stock market appears flat in 2022 due to the small increase, but that was after a dramatic increase since spring 2020.
Figure 2 presents the results of a $1,000 investment had it been made in 1980, near the previous peak in Iowa land values. In 1980, the $1,000 investment in land would have purchased only .54 acres of land or 8.73 shares of the S&P. By 2022, the land investment would have been worth $28,081 while the S&P investment would have been worth $1,000,668. The land investment would only be 28% of the stock market investment.
Similarly, Figure 3 presents the results of a $1,000 investment had it been made in 2010, following which the land market experienced significant increases until 2014 and then noticeable declines. Before 2014, the land investment would yield a slightly better return than the investment in the stock market. However, Iowa farmland values decreased from $8,320 in 2014 to $7,070 in 2020 and then rebounded in 2021-2022 according to USDA data. Figure 3 confirmed the flat trajectory from 2014 to 2020 for the land investment while the stock investment returned more.
Figure 4 shows a comparison of the values in 2022 based on investing in each individual year. This figure presents the returns to an investment in the S&P as a percent of the returns to Iowa farmland. In other words, the value for any year would be the present value of an investment in the S&P made in that year as a percent of an investment in farmland made that same year. In Figure 4, if the value is above 100%, then the S&P would have a higher value; conversely, if the value is below 100%, then the farmland investment would have a higher value for funds invested in that year.
Figure 4 shows that the timing of the investment makes a difference in which appears to be a better investment. Land would have been the better investment in most of the years except the period from 1974 to 1984 and most recently 2008 to 2020. This period coincides with the rise in land values during the 1970s era of stagflation. Land values in Iowa began their rapid rise in 1973 and peaked in 1981. Due to historically low interest rates and strong agricultural demand, Iowa farmland values have been at record-high levels since 2003.
While Figure 4 provides a useful perspective on the relative return of the value of S&P or farmland investments, it assumes the asset is held until 2022 and then bases the comparison on the terminal value of these assets in 2022. Further examination of Figure 1 shows that if the farmland or S&P investment initially purchased in 1950 were sold in 2000, the S&P 500 would be viewed as the better alternative. However, if sold in 2010, the farmland investment would show a higher return. In other words, the holding period matters for the relative performance of the farmland versus S&P 500 investment.
Figure 5 shows the percent of value of the S&P 500 relative to farmland investment sold in 1986, 2005, 2013, or 2019 as opposed to 2022 shown in Figure 4. In particular, the purple line shows that if farmland was purchased in 1980 right before the farm crisis and sold in 2005 right before the farmland values really took off, the value of the S&P 500 investment relative to the farmland investment would be more than four times. In contrast, the blue line shows that if farmland was purchased in the late 1990s and sold in 2013, the return would be 2-3 times better compared to holding S&P 500 stocks for the same period. Figure 5 reveals the volatility in the relative return of the two investments depending on when purchased or sold.
Discussion and conclusions
Which is the better investment, Iowa farmland or the stock market, is a complicated question, and there is no one best answer. Several factors need to be considered when trying to answer this question and several assumptions must be made.
Even with record farmland market and stock highs, the basic findings are similar to previous analyses. The level of the returns depends upon the initial investment year and the year of sale. Farmland purchased during peak value periods produced lower returns than the stock market. As shown in Figure 4, land purchased in the late 1970s and early 1980s and land purchased in 2009 to 2019 show lower percentage returns than S&P stock purchased in similar years.
Land purchased in 2019 or 2020 has shown a greater return due to recent surges. Although given our assumptions, returns to land and stocks are similar for 2022. What analysis in later years will show is uncertain. It appears land will continue to produce higher returns but there are many complicating factors to such conclusions.
Which is a better investment depends in large part on your objectives and the assumptions made in calculating the returns. We assumed financial gains would be the overriding objective. However, for many people simply owning land provides significant value. The 2017 Iowa Farmland Ownership and Tenure Survey shows that half of the land in Iowa is owned by the same owner for over two decades, 82% of farmland is owned free of debt, and 29% of Iowa farmland is owned primarily for family or sentimental reasons. Land ownership can be a means of security, an asset to pass to heirs, or held for certain prestige associated with ownership.
In this article, we assumed real estate taxes, a management fee, insurance, and maintenance were subtracted from the return to land. These were the only ownership costs for land. There would be other costs that would vary with the individual circumstances. This study also does not take into account any transactions costs. There would be costs associated with either the purchase of farmland or the purchase of stocks.
Investing $1,000 in the stock market would not be difficult but investing only $1,000 in the Iowa farmland market would be. Although the methodology employed here could be scaled up to any level of investment, it is simply not possible for the majority of people to find the wherewithal to purchase enough land for a viable farm operation or more likely, it is more difficult to find small enough farmland parcels for sale. We have run the same analysis by assuming a $1 million initial investment amount, and the general insight remains the same.
There are alternatives for farmland investment. Some brokerage houses and other investment services offer the opportunity for farmland investments. We did not include this form of investment in our analysis due to the difference in requirements and potential returns.
Subject to the assumptions made which is a better investment, farmland or the stock market, depends on when the investment was made and the year of the sale. Recent changes in the macro conditions have raised questions about which is the better investment. At this time, many conflicting factors will determine the impact of record highs on the returns. Several factors will continue to impact the returns to farmland or the stock market, including: volatile commodity prices, grain shortages caused by the Russian invasion of Ukraine, increasing interest rates to help curb inflation, record deficits, changes in labor markets, continuing response to COVID-19, US-China relations, and supply chain disruptions. These factors, as well as others not yet known, will influence the answer to the question, which is the better investment. For now, the answer remains the same, it depends on timing.
Note: This article is an update of previous versions. The last version of this analysis can be found in the Ag Decision Maker newsletter archives.
Wendong Zhang, extension economist, wendongz@cornell.edu
Michael D. Duffy, retired economist. Questions?
