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Thursday, May 5, 2016

Extension Line

Thursday, April 28, 2011

This week I am turning Extension Lines over to Dr. Mike Duffy, ISU Extension Economist, to discuss the comparison of the stock market and Iowa land values.

The recent decrease in Iowa farmland values and the turbulence in the stock market have resurrected this perennial question. Which is a better investment - the stock market or farmland?

Iowa farmland values have shown yearly increases for ten of the past eleven years. The values remain at record high levels where they have been for the past eight years. Based on the Iowa State University Land Value Survey, the 2010 estimated average farmland value in Iowa was $5,064 per acre. This was an increase of 15.9 percent from the 2009 estimate. Since 1990, the estimated average value of Iowa land has more than quadrupled, going from $1,214 to $5,064 per acre.

The composite value of the stock market, as measured by the Standard & Poor's Index (S&P) average, has started recovering from the disastrous 2008 year. Even though the S&P lost almost 32 percent of its value between 2000 and 2008, its overall record has been impressive since 1990. Stock values rose from 328.75 in 1990 to 1,241.53 in December 2010, an increase of over 300 percent in spite of the 2008 decline.

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. The amount of land or stock purchased will depend on the existing value. For example, in 1960 the average farmland value in Iowa was $261 per acre. So, for $1,000, 3.83 acres could have been purchased. 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.

The timing of the investment makes a difference in which appears to be a better investment. Land would have been the better investment in all years except the period from 1974 to 1984. This period coincides with the rise in land values during the 1970s.

Which is the better investment, Iowa farmland or the stock market, is a complicated question and one for which there is no one best answer. The value of land is determined by its income earning potential. For the most part, in Iowa, that means the returns to corn and/or soybeans. Oil prices, ethanol prices, crop yields, costs of production, economic recovery, alternative biomass sources and a host of other major issues will have an influence on the price of land.

The performance of the stock market for the next few years is also not clear. The impact of the stimulus package and how soon it will be felt are unknown at this time. Further compounding the situation is the impact of government ownership of several major companies.

The budget deficit continues to grow and will place a burden on the economy as the U.S. seeks to find ways to support the level of expenditures and revenues it has seen over the past few years.

Lands performance relative to the stock market over the past few years has been spectacular. Will this trend continue? Time will tell. Which is the better investment? As the old saying goes, timing is everything in the success of a rain dance.

To view the entire Duffy article, go to: http://www.extension.iastate.edu/agdm/ar...