(Dow Jones) Investors still see green in farmland.
A growing number, some of whom don't know the difference between John Deere and John Doe, are investing millions of dollars in high quality land in states like Iowa, Illinois and Nebraska.
"There are people buying farms today who five years ago had no idea they would buy it," says Murray Wise, chief executive officer of the Westchester Group, Inc, a global agricultural asset manager.
A boom in farmland prices was fueled a few years ago by the demand for ethanol and an increased popularity in ranch land and recreational farms. Today, investors shaken by the market turmoil are attracted to the relatively stable 3% to 6% returns for renting farmland-significantly more than they could earn on a CD or money market fund.
"Farmland looks substantially better than the stock market," says Jim Farrell, president and CEO of Farmers National Company. He says that nearly half of the farmland in the Midwest is owned by non-operating landowners, many of whom like its rental income and increased land valuations.
R. Dennis Moon, managing director of specialty asset management at U.S. Trust-Bank of America Private Wealth Management, says that while there are risks such as higher production costs and potentially lower farm subsidies, the farmland returns are consistent, and there is transparency.
"Farmland is always a good investment, but even more right now because of the continued (worldwide) population growth," he says.
The investment requires deep pockets and isn't for short-termers: Clients typically invest millions of dollars for at least a decade and lease the land to farmers. Annual returns after expenses have been 5% to 6.5% plus the appreciation of the land.
"Land is a better investment most years-unless you bought in the late 1970s or early 1980s," says Mike Duffy, an economics professor at Iowa State University in Ames, Iowa, who has compared the values of farmland with the S&P. Timing can make a difference, he says, because land values in Iowa increased 30% three years in a row in the 1970s. At the higher prices, "you were able to purchase less land."
After dipping somewhat in the downturn, farmland prices are stabalizing or rising-especially productive land-because the demand outweighs the supply. Duffy says the average value of Iowa farmland, which is some of the best in the U.S., remains at record highs. It was worth in 2009 an estimated $4,371 per acre compared to $1,214 in 1990.