Here's the dirt on where the real smart money has been heading lately: It's going into the ground. Since 2000, the average price of U.S. farmland has zoomed 74%, to a record $1,900 an acre, while the benchmark Standard & Poor's 500-stock index has risen only 7%.
Prices are soaring, in part, thanks to demand for corn for biofuels and for building sites for new homes. That raises the chance that prices are at a peak. Beyond that, farmland is inherently risky: Crop cycles are variable, and tenants often have trouble paying rent in poor harvests. "It's the volatile end of the more volatile end of real estate," warns Alan Dorsey, the alternative investment strategist at Lehman Bros. (LEH).
Still, high-net-worth investors hoping to diversify their portfolios are buying farmland because the returns are not correlated with stocks and bonds. A small but growing group of advisers is helping them plant their stakes. Many of these advisers predict it will still be possible to reach annual returns on U.S. farmland of about 10% to 12% over a long investment horizon. The current rally in agricultural commodities could drive returns significantly higher. "The vehicles to invest in farmland are limited now, but will grow in 2008," says Cynthia Steer, chief research strategist at pension consulting firm Rogerscasey.
At the high end--a minimum $40 million investment--one option is a separate account in which to build a portfolio of properties. For a management fee of roughly 1%, Boston's Hancock Agricultural Investment Group (MFC) will assemble 10 to 20 U.S. farms in diverse locales that produce a variety of crops. Westchester Group Inc. in Champaign, Ill., works with individuals aiming to invest several million dollars to build their own farm portfolios.
Below that level, you might get more diversification from a pooled investment. For example, Soy Capital Ag Services in Kankakee, Ill., is raising a farmland investment fund to acquire Midwestern properties. If you're set on a single property, Hertz Farm Management in Monticello, Ill., will help individuals willing to spend $200,000 find a farm, though a quality parcel runs $400,000 to $500,000.
The boldest investors are going into emerging markets. Hertz Chairman Joel Hertz picked up 14,000 acres in Brazil for a group of individuals who each contributed a minimum of $25,000 to a roughly $15 million private placement that is not yet entirely invested. Don't worry. The group is not clear-cutting the rain forest, but acquiring existing farmland far from it. Says Hertz: "It's a place of opportunity."
By Emily Thornton