Gyroscopic Investing

Using the historical data from UNL (see link below), I developed the spreadsheet below.  Farmland has been described as “gold with a dividend.”?  From my analysis, it appears to act goldlike, not quite as volatile but more steady.  Perhaps it’s performance  could be described as a hybrid  between gold and TIPS.  Overall using farmland in place of cash in the PP produced a CAGR of 11.0% versus 10.0% for the standard PP with essentially the same standard deviation.  The big advantage of using farmland would seem to be when you have negative interest rates. Clive has talked about as a big concern of his in a previous post.  In this scenario, cash would lag inflation by quite a bit but farmland should produce a higher return than inflation. 

Of course this is outside of PP orthodoxy but I don’t think adding another asset which has a zero correlation with the other PP assets is a bad idea.  Young people who don’t have a lot of money can’t really get involved with farmland but people with some savings can – there are ways to buy farmland as a group then splitting up the land purchased.  That’s what I’m currently doing.  Love to hear people's comments, critiques, criticisms, etc (Clive?)

http://agecon.unl.edu/realestate.html

Year Neb Farmland Price Neb farmland (%)       Neb Cash Rent ($/acre)       Neb Cash Rent (%) Total return Neb Farmland Original HBPP PP using land
1972 X 12.1 X 8.6 19.7 18.8 22.8
1973 X 31.7 X 10.6 41.3 15.6 24.4
1974 X 31.3 X 9.6 39.9 14.2 21.9
1975 X 31.3 X 6.1 36.4 8.3 15.4
1976 X 24.9 X 4.1 28.0 12.2 16.9
1977 X 6 X 3.7 8.7 5.6 6.8
1978 1545 13.5 X 3.6 16.1 12.1 14.8
1979 1705 10.4 X 3.3 21.3 42.1 44.9
1980 1976 15.9 X 5.2 9.7 13.4 12.3
1981 2088 5.7 114 5.5 11.1 -3.9 -5.9
1982 2053 -1.7 119 5.8 4.1 23.3 19.5
1983 1798 -12.4 110 6.1 -6.3 4.2 0.5
1984 1613 -10.3 115 7.1 -3.2 3.2 -0.8
1985 1304 -19.2 105 8.1 -11.1 20.8 14.7
1986 940 -27.9 90 9.6 -18.3 18.8 11.3
1987 802 -14.7 88 11.0 -3.7 6.2 3.8
1988 948 18.2 94 9.9 28.1 4.3 9.9
1989 1210 27.6 111 9.2 36.8 13.5 20.5
1990 1413 16.8 113 8.0 24.8 1.6 5.6
1991 1518 7.4 119 7.8 15.3 13.1 14.2
1992 1563 3.0 109 7.0 9.9 4.4 5.2
1993 1609 2.9 118 7.3 10.3 12.9 13.8
1994 1666 3.5 121 7.3 10.8 -2.5 0.4
1995 1671 0.3 120 7.2 7.5 18 16.9
1996 1738 4.0 124 7.1 11.1 4.9 6.6
1997 1858 6.9 129 6.9 13.8 7.5 9.3
1998 1972 6.1 129 6.5 12.7 10.8 12.3
1999 1861 -5.6 123 6.6 1.0 4.2 4.0
2000 1754 -5.7 123 7.0 1.3 3.2 1.3
2001 1729 -1.4 128 7.4 6.0 0.9 0.4
2002 1825 5.6 128 7.0 12.6 7 8.2
2003 1835 0.5 129 7.0 7.6 14 15.3
2004 1961 6.9 134 6.8 13.7 6.6 9.7
2005 2153 9.8 134 6.2 16.0 8.1 11.7
2006 2295 6.6 135 5.9 12.5 11 13.2
2007 2431 5.9 150 6.2 12.1 12.9 14.4
2008 2934 20.7 173 5.9 26.6 1.9 7.0
2009 3030 3.3 169 5.6 8.8 6.8 6.5
2010 3155 4.1 174 5.5 9.6 18.4 16.5
2011 3940 24.9 197 5.0 29.9 11.5 16.5

Note: I used Iowa Farmland data for the 1972-1978 period so I could show a comparison to the PP over the lifetime of the PP (1972)

I think as a part of the variable portfolio having some real estate exposure with either a REIT or farmland/timber/etc. is a decent speculative bet due to the income potential if you can shelter it from taxes. Also it does have strong inflation protection properties.

FarmerD...how would you advise a city-dweller to start investing in farmland? Is there a useful website / blog you've found which discusses this?

What is a practical minimum amount of $$$ required to begin?

Does anyone know if there are any farmland REITs that are publicly traded?

I would be interested in something like that.

murphy_p_t wrote: FarmerD...how would you advise a city-dweller to start investing in farmland? Is there a useful website / blog you've found which discusses this?

What is a practical minimum amount of $$$ required to begin?

Farmland is frequently bought by private equity firms (Soros, Jim Rogers, etc) and you can find those online.  I'd much rather directly own the land.  The problem is, farmers hold onto the land and pass it along to their kids so farm sales are relatively infrequent.  And when they are sold the owner usually sells the entire property which is probably going to be hundreds of acres which can easily run you $500-several million.  However, sometimes a  farmer needing money might sell a small chunk of his land.  I have also seen people pool their money and buy a farm.  It works like this: the group agrees to their maximum auction bid, then one guy buys the farm in whole then immediately sells to the others at the auction price.   Probably you’d need to consult an attorney if you go this route.

One thing I’ve learned over the years: auction can often bring surprising results.  Sometimes people bid like crazy and other times the land is sold for bargain basement prices.

The only company I know that can assist people to buy farmland is Farmer's National.  I have no direct knowledge of this company at all so take this for what it’s worth, but it appears they can assist potential buyers for a fee.  I just pulled up their website and see they offer professional land appraisal, investment analysis, etc. 

http://www.farmersnational.com/

Quick aside: Right now farm area banks offer 4.1% interest loans to buy farmland.

Quick aside: There are a buttload of  people who have never stepped foot on a farm from the east coast aggressively buying farmland in the corn belt, so don’t be intimidated.  But please read up and make sure you understand what you’re doing. 

Look I just got a Google ad for Canadian farmland investments:

http://www.farmlandinvestmentpartnership.com/

This stuff reads highly speculative I'm afraid. I may have to move the thread to the Variable Portfolio forum land.

More returns here:

http://www.ncreif.org/farmland-returns.aspx

Just thinking it may be easier to buy some big Ag companies instead like Archer Daniels Midland, etc. They own the farms that run the land if you wanted to speculate. Maybe there is an index? Don't know.

Then again Jim Rogers and others have been talking about this for years and these stocks got just as hammered in 2008 as everyone else.

craigr wrote: More returns here:

http://www.ncreif.org/farmland-returns.aspx

Just thinking it may be easier to buy some big Ag companies instead like Archer Daniels Midland, etc. They own the farms that run the land if you wanted to speculate. Maybe there is an index? Don't know.

Then again Jim Rogers and others have been talking about this for years and these stocks got just as hammered in 2008 as everyone else.

I thought about investing in MOO but MOO is closely correlated with the stock market in general.  Farmland, by comparison has a zero correlation to the stock market but a 90-95% correlation to the inflation rate.  In other words, it's just like TIPS but with a greater real return and with no chance the govt can screw with the return by "adjusting" how it's calculated.

If you substitute farmland returns for cash in the PP, the CAGR improves from 10.0% to 11% over the past 40 years with the same deviation.  If you believe as I do (and has Clive has posted) negative rates may persist as govt supresses yields, then farmland would be preferred over holding cash as 1-5 year treasuries.  Therefore a PP with 25% farmland replacing cash should outperform a PP with 25% cash IMO.

clacy wrote: Does anyone know if there are any farmland REITs that are publicly traded?

I would be interested in something like that.

There's no Farmland REITS yet but several investment firms have them in the works. 

craigr wrote: Look I just got a Google ad for Canadian farmland investments:

http://www.farmlandinvestmentpartnership.com/

This stuff reads highly speculative I'm afraid. I may have to move the thread to the Variable Portfolio forum land.

If someone has enough money for some small acreage and they live in or near a farming area, I'd just have them check out the farm auctions in the area.  Purdue, UNL Iowa etc all publish analysis of farmland price thrends and the propects for the future.  The path with the least counterparty risk is direct ownership and if some company management company can help you directly buy the land for a fee, I'm fine with that.  Buying into some LLC or partnership arrangement for joint ownership of land should be avoided unless you truly know what you're doing. 

craigr wrote: More returns here:

http://www.ncreif.org/farmland-returns.aspx

Just thinking it may be easier to buy some big Ag companies instead like Archer Daniels Midland, etc. They own the farms that run the land if you wanted to speculate. Maybe there is an index? Don't know.

Then again Jim Rogers and others have been talking about this for years and these stocks got just as hammered in 2008 as everyone else.

I don't think ADM owns any farmland though i could be wrong.  They are a grain processing and tranportation company.  I interviewed for a job there 20 years ago.

Clive your suggested mix sounds much like this:
http://www.usnews.com/opinion/blogs/eco ... its-riches

When one inquires of family members and representatives as to what it takes to preserve wealth over centuries and not just cycles, the frequent reply is "a third, a third, and a third." This is shorthand for dividing one's wealth into one-third land, one-third gold, and one-third fine art. Obviously some liquidity is needed for day-to-day expenses and some room can be made for a speculative portfolio, but the basic idea that land, gold, and art outlast and outperform riskier assets such as stocks, bonds, and cash seems sound when viewed from the perspective of centuries and not just years or decades.

Whatever collectibles you decide to add to your portfolio, I highly recommend that you have an interest and passion for those collectibles, rather than just looking at them as passive investment vehicles.

For example, when I was an adolescent, I collected comic books.  I particularly liked X-Men, X-Factor, and other Marvel comics dealing with mutants.  This was in the 80s, long before these franchises had many successful movies.  My mint copy of X-Factor #1, which was purchased with $1.25 in 1986 from my newspaper delivery route, is now worth $160.  My mint Wolverine #1, purchased in 1982, for $0.60 or UK 25 pence, is now worth $600.

The reason I would suggest that you develop a passion for whatever you are collecting is that if you don't know the material, you might not have a feel for what will be popular or in demand in years to come.  Even my 12 year old brain could understand that a super hero like Wolverine, who had claws made of adamantium, and could heal any wound in seconds, was amazing.

I think you could do quite well for yourself on collectibles alone, provided you pick the right collectibles and have a knack for it.  I only made $60 US a month delivering newspapers for 1 hour a day in the 80s, and my collection of comic books is worth thousands.

Storm wrote: Whatever collectibles you decide to add to your portfolio, I highly recommend that you have an interest and passion for those collectibles, rather than just looking at them as passive investment vehicles.

For example, when I was an adolescent, I collected comic books.  I particularly liked X-Men, X-Factor, and other Marvel comics dealing with mutants.  This was in the 80s, long before these franchises had many successful movies.  My mint copy of X-Factor #1, which was purchased with $1.25 in 1986 from my newspaper delivery route, is now worth $160.  My mint Wolverine #1, purchased in 1982, for $0.60 or UK 25 pence, is now worth $600.

The reason I would suggest that you develop a passion for whatever you are collecting is that if you don't know the material, you might not have a feel for what will be popular or in demand in years to come.  Even my 12 year old brain could understand that a super hero like Wolverine, who had claws made of adamantium, and could heal any wound in seconds, was amazing.

I think you could do quite well for yourself on collectibles alone, provided you pick the right collectibles and have a knack for it.  I only made $60 US a month delivering newspapers for 1 hour a day in the 80s, and my collection of comic books is worth thousands.

Nice to know there are other comic book holders out there. Right now my "prized" comic is Iron Man #3 from 1968. Bought it for $25 back maybe 10 years ago and looks like it's worth perhaps $100 now.

Storm wrote: I think you could do quite well for yourself on collectibles alone, provided you pick the right collectibles and have a knack for it.  I only made $60 US a month delivering newspapers for 1 hour a day in the 80s, and my collection of comic books is worth thousands.

Comics went through a bust similar to the Video Game Crash of 1983, so real values have not generally kept pace with inflation since then.  The relatively recent Marvel movie releases have gradually increased demand and attention for those certain titles, though.

The same crisis situation occured with baseball cards.

It's really hard to advocate putting more than 1.25% each or so in these kind of alternative real assets due to rebalancing issues (12.5% / 1.25% = 10 non-gold investments) and timing.

I am going to be adding rental real estate to the PP soon since that is clearly near a bottom.

Machine Ghost

I am going to be adding rental real estate to the PP soon since that is clearly near a bottom.

Isn't it true though that  commercial real estate in Tokyo financial district is now selling at <1% of what it sold for in the late 1980s and Japanese residential real estate is now still 80% down from late 1980s prices? I wonder how many points "clearly near a bottom" have been traversed over the past couple of decades in the Japanese real estate market.

We went heavily into rental real estate here in the UK in the late 1990s when gross yields exceeded 10%, while stocks were yielding about 2%.  With hindsight it was the best move in 40 years of investing.  Rents have been increasing in line with inflation since and the capital has comfortably more than doubled.  Stocks meanwhile came off the all time high of 1999.

With rent income in the UK now at about 4% gross we would not be adding to our property portfolio today.  The USA however may well be attractive today.  Yields are the best guide.

stone wrote: Isn't it true though that  commercial real estate in Tokyo financial district is now selling at <1% of what it sold for in the late 1980s and Japanese residential real estate is now still 80% down from late 1980s prices? I wonder how many points "clearly near a bottom" have been traversed over the past couple of decades in the Japanese real estate market.

If you buy low (i.e. yields in the teens), you'll make money over time even if the capital does nothing but go sideways.  Rental income yields in Japan should be 20%-30%+ if the prices had kept going down as you imply, but that is not the case.  There's always a natural bottom for real assets.  Its also quite laughable to compare the US bubble to the Japanese bubble where the Imperial Palace grounds once cost more than all of the real estate in California.

For collectibles, I think you're right - I would never consider using anything other than disposable income to buy them...  But, if you think about what just $60 a month of disposable income can do, it's impressive.  People spend this much money on a single dinner out with the family.

MachineGhost wrote:

stone wrote: Isn't it true though that  commercial real estate in Tokyo financial district is now selling at <1% of what it sold for in the late 1980s and Japanese residential real estate is now still 80% down from late 1980s prices? I wonder how many points "clearly near a bottom" have been traversed over the past couple of decades in the Japanese real estate market.

If you buy low (i.e. yields in the teens), you'll make money over time even if the capital does nothing but go sideways.  Rental income yields in Japan should be 20%-30%+ if the prices had kept going down as you imply, but that is not the case.  There's always a natural bottom for real assets.  Its also quite laughable to compare the US bubble to the Japanese bubble where the Imperial Palace grounds once cost more than all of the real estate in California.

Can't both prices and rents fall in tandem over decades?