HAI: Because it sounds good in a headline?
Colvin: Exactly. It’s just their lack of experience and expertise in the market. I remember my grandfather, a farmer in South Dakota, telling me growing up that if you got a bumper crop one out of every five years, that’s a great thing. Now I would say the market, or at least just the perception now, is that bumper crops come four out of every five years, which really isn’t the case; historical data would not support that.
As an investor, you should come in every year expecting a bad crop.
HAI: What’s the agricultural story no one is talking about?
Colvin: Investors are forgetting the demand story. The USDA thinks that corn demand is much more elastic than it is in real life. As I said earlier, the USDA reported the demand destruction of more than 1 million bushels of corn this month. It’s not that easy to switch from corn to wheat. The cattle don’t like it, farmers don’t like to buy it and typically, if they’re going to switch to wheat to feed their livestock, they need to commit for a six- to nine-month period to allow livestock to adjust.
The last few years when prices got high, a lot of farmers we were talking to said, “Yes, it makes economic sense to switch to wheat, but I’m just worried about my livestock and the effect the switch will have.” They will pay the higher prices for corn. So are you going to see demand destruction? Yes. But at this extreme amount, I don’t think so.
Then there’s the other side of the story: China is still aggressively looking to buy corn as much as possible. Now at $7 a bushel, they’re still not as excited. But they still need corn and the U.S. is still the world’s largest exporter of corn. We have a 60 percent market share. While China will be looking towards South America and Eastern Europe to buy at cheaper prices, eventually they’re going to have to come back to the U.S. farmer to make that shortfall for their grains.
HAI: Let’s move over into your new book, “Investors’ Guide to Farmland.” Give a quick summary of how the common investor can get exposure to farmland short of moving to Iowa and buying tractors.
Colvin: That’s the primary reason we started Colvin & Co., to provide investors with the opportunity to have a path of investment in farmland without actually becoming a farmer themselves or moving to the Midwest. The best way to play agriculture is really farmland. And it’s a real asset, driven by commodity prices, inflation and production. But it also doesn’t have that same volatility that commodity prices or equities are going to have.
For the long-term investor, we think farmland is the best way to play it. But you know, unfortunately farmland doesn’t sell in small lots, and you have to put a significant amount of capital to work to make it cost-effective and efficient. Not every retail investor can do that.
So the next-best way to gain ag exposure is through a diversified basket of ag-related equities that will perform and be driven by the global demand for grain; for example, companies such as John Deere, ADM, DuPont, Magenta, etc. And there are a lot of great ETFs out there like the Market Vectors Agribusiness ETF (NYSE Arca: MOO) that do all the work for you.
We also recommend investments in the underlying commodities themselves. But we always caution that a long-term, buy-and-hold move in commodities might not necessarily be the best investment. It requires some market timing, and you need to be aware of the pricing patterns, the global-demand story, the weather, etc. So for the investor that’s looking to buy and hold for 10 years, we think ag-related equities would be a better place to invest.
HAI: I recall seeing that farmland prices have outperformed the S&P 500. Is that true?
Colvin: Well, if you chase the last-decade farmland values, according to the USDA, across the U.S., they are up 104 percent. The S&P 500 is down roughly 7.5 percent.