If Mark Twain was talking about investing in farmland when he suggested "buy land - they’re not making anymore," then he knew more about finance than he’s credited with.



The Federal Reserve Bank of Chicago just reported that prime farmland prices in the heart of the U.S. grain belt (Indiana, Illinois, Iowa, Michigan and Wisconsin) - were up 17% in the second quarter compared to 2010, the biggest year-over-year increase since 1977.



That’s on top of a 12% jump for all of 2010, the second-largest yearly increase in the past 30 years.



In fact, farmland value since 2000 has appreciated by more than 1,200%, according to the National Council of Real Estate Investment Fiduciaries (NCREIF), and netted nice profits for farmland investors.



Just look at the NCREIF’s Farmland Returns Index, which measures the quarterly performance of a large pool of individual agricultural properties acquired in the private market for investment purposes.



The index has posted some incredible quarterly gains over the past decade - most notably 22.78% and 14.63% in the fourth quarters of 2005 and 2004, respectively.



Farmland gains for the first two quarters of 2011 were recently reported at 2.40% and 1.48%.



What’s more, negative quarterly returns for farmland are extremely rare. Only once since 1992 has the NCREIF Index fallen period-over-period, and that came in the fourth quarter of 2001 amid post-9/11 economic turmoil.



Given the large value gains since 2000, a lot of potential has been realized, but there’s plenty of room for future profit.



"It’s not the first inning of the game," Shonda Warner, managing partner at Chess Ag Full Harvest Partners, told CNBC, "but it’s not the eighth inning either."

 

Farmland Prices: Plenty of Room to Grow

Rising commodity prices are the primary reason farmland values have soared. They’ve carried sales prices on recent land transactions in Iowa and Illinois to as much as $13,000 an acre - almost double what they were just five years ago.



U.S. Department of Agriculture (USDA) Chief Economist Joseph Glauber said land value increases that large may not be sustainable, but he acknowledged that steadily increasing food demand would likely prevent a major collapse in farmland prices. The USDA estimates rising global food demand will increase annual U.S. agricultural exports to roughly $113 billion by 2017 from $98.6 billion in 2009.



Annual population growth is advancing at a rate of 1.1%. That means the population of the entire planet will be 9 billion by 2050, up from about 7 billion now.



And many big-name investors are major farmland buyers, driving demand that will boost prices even higher.



Noted commodity investor Jim Rogers told CNBC he began buying farmland for both his personal and fund accounts several years ago. And numerous sources have reported that billionaire hedge-fund kingpin George Soros has been selling gold to purchase farmland blocks in various countries. One fund he controls owns 23.4% of a private South American farmland and renewable-energy conglomerate called Adecoagro.



Investment management firm BlackRock Inc. (NYSE: BLK) recently announced it had taken a multi-million dollar position in farmland in several Mid-western states.



"Farmland is a theoretically safe, income-producing, inflation-protected hedge," former Morgan Stanley (NYSE: MS) strategist Barton Biggs, who now runs a hedge fund for Traxis Partners LP, told CNBC. He said it has historically provided a "rock-steady return" that he estimated at 6% to 7% annually.



Another perk for farmland investors: it has a high correlation to inflation, historically 90% to 95%. As inflation continues to soar, a good farmland investment can offset the price-gain pain.



Investing in Farmland: Six Ways to Play Now

Not everyone can quickly and easily purchase blocks of farmland. For those needing an alternative, the closest thing to a pure farmland play among exchange-traded funds (ETFs) would be the Market Vectors Agribusiness Fund (NYSE: MOO).



MOO seeks to replicate the performance of the DAXglobal Agribusiness Index, which consists of global companies engaged in agriculture business, many of which do have large farmland holdings. MOO shares are driven more by commodity prices than by land prices, so the volatility is higher - but so are the chances for relatively quick gains.



A more indirect way to play farmland values is to invest in a large U.S.-traded agribusiness company. Most own or lease large chunks of land in conjunction with their other operations.



Three you might consider are:

• Bunge Ltd. (NYSE: BG), recent price $64.56 – Bunge operates in about 40 countries, where it buys, sells, stores and transports oilseeds and grains, makes protein meal for animal feed and edible oil products for commercial and retail consumers, produces sugar and ethanol from sugarcane, mills wheat and corn to make ingredients for food companies, and sells fertilizer in North and South America. The company was founded in 1818, and the 2010 value of its farmland, plants and equipment was listed at $5.31 billion. The company earned $6.83 a share in its most recent fiscal year, has a modest trailing 12-month Price/Earnings (P/E) ratio of just 8.85 and pays a dividend of $1.00 a share, yielding 1.6%.


• Archer Daniels Midland Co. (NYSE: ADM), recent price $28.26 - Archer Daniels’ is a major processor of oilseeds, corn, wheat, cocoa and other agricultural commodities and manufactures corn sweeteners, vegetable oil and protein meal, flour, biodiesel, ethanol and other food products. It also has a grain elevator and transportation network to store, clean, and transport many agricultural commodities. Its property holdings, including farmland, were valued at $8.71 billion for the year ending June 30, 2011. It reported at net profit of $1.93 billion, or $3.13 a share, and pays a 64-cent dividend for a yield of 2.3%.


• Monsanto Co. (NYSE: MON), recent price $68.93 - Monsanto and its subsidiaries are among the world’s leading suppliers of seeds - both natural and genetically engineered - fertilizers, herbicides and other products designed to improve productivity and reduce farming costs. It operates in nearly 80 countries, including China. Monsanto in fiscal 2010 had net income of $1.1 billion, or $2.88 a share, on revenue of $10.5 billion. Its $1.20 dividend provides a yield of 1.71%.

Two foreign-based companies that do have good liquidity and fairly easy access in the U.S. are:

• Cresud Inc. ADRs (Nasdaq: CRESY), recent price $13.95 - Based in Argentina, Cresud also engages in farming in Brazil and has investments in agricultural operations in a number of other Latin American countries, focusing on grains, beef cattle and milk production. The company earned 61 cents a share on revenue of $1.88 billion in its most recent fiscal year. The stock pays a dividend of 33 cents a share, good for a 2.43% yield.


• Cosan Ltd. (NYSE: CZZ), recent price $10.97 - Brazil-based Cosan grows and processes sugar for human consumption and for use in ethanol production. It also sells sugar all over the world, holds property - including farmland - valued at $4.14 billion in 2010, and had more than $900 million in cash and equivalents at the end of its latest fiscal year. The company logged $8.28 billion in revenue last year, which netted per-share earnings of $3.36. The 28-cent dividend provides a yield of 2.55%. [Note: Cosan is a component in the iShares MSCI Brazil Index, which trades as an ETF (NYSE: EWZ), recent price $65.91, so you might consider that as an alternate investment if you want more South American diversification.]

One More for the Road…

Small investors may get frustrated at the lack of liquidity when investing in farmland, and no real estate investment trusts (REITs) are currently listed on U.S. exchanges - but it may be only a matter of months before there’s a pure-play farmland option available.



Gladstone Investment Corp. (Nasdaq: GAIN) filed papers in late 2010 to create a REIT based on the holdings of its Gladstone Land Corp., an externally managed investment firm that owns two large farms in California.



The properties cover about 960 acres and are leased to Dole Fresh Vegetables, a subsidiary of Dole Food Company Inc. (NYSE: DOLE), which uses them to raise strawberries and various vegetables. Gladstone is raising money to buy more land and set up a farm mortgage division, and hopes to qualify for listing as a REIT by year-end.



This article was republished with permission from Money Morning.