For a Fee, Private Banks
Manage Working Farms

As Wall Street struggles to gain traction in a year in which stocks have basically gone nowhere, wealthy investors are digging around in some new pastures -- literally.

Bank of America Corp. and J.P. Morgan Chase & Co. are among the major players pitching working farms and ranches as an alternative investment. The idea is to buy the land and then let a private bank or trust company manage the cattle, corn, soybeans and almond orchards.

Bank of America says its private bank unit now manages more than two million acres of ranch and farmland, a number that has been growing briskly in recent years. The bank's farm and ranch-management program, which began as a regional offering in its San Antonio private-bank office, is now a national product. The San Antonio office has also made about $300 million in farm and ranch loans in the last few years.

JPMorgan Private Client Services says it now manages about two million acres of land. A handful of trust companies and other banks, such as Wachovia Corp., also manage ranches and farms for high-net-worth clients.

Wealthy investors are turning to a new kind of diversification: ranches and farms.

This isn't hobby farming. These are investments just like any other real estate, but instead of profiting from apartment rentals and store leases, farm and ranch investors are reaping what is sown in the field.

In many of these cases, the farmer who sold the land stays on to run the daily operations, reporting to the bank or trust company. The farmer then either shares a part of the crop's proceeds with the investor or leases the land back from the investor. Crop sharing offers greater reward, but with greater risk. If pests or severe weather hits a crop -- such as the four hurricanes that slammed Florida's citrus industry this year -- the harvest and the profits shrivel. A bumper crop, however, can provide big windfalls. With a lease, an investor simply pockets a set payment, while the risk and reward stays with the farmer.

Interest from investors has been mainly focused on cropland in the Midwest, where corn and soybean farms dominate. Cattle ranches in Texas are also popular, as are permanent plantings in California, like almond, walnut and fruit orchards.

This interest in ranch and farmland mirrors the broader interest in real-estate investing. In the wake of the bear market that began in 2000, and with inflation once again a worry, investors have been moving into real assets that aren't affected by Wall Street's gyrations and which will be protected from the expected rise in inflation. Land has historically been a good investment in that scenario.

While owning a cotton field doesn't have the pizazz of owning a winery, says Gene Dunbar, farm and ranch executive for Bank of America's private bank, "we have investors who just think it's neat to be at cocktail parties talking about owning a farm."

Depending on location, working farms are typically spinning out net returns of 3% to 7% annually. That means a $1 million investment can generate as much as $70,000 a year in cash flow after all expenses.

The potential for appreciation is also part of the pitch, of course. Prices for farms and ranches have been escalating at about 2% to 3% a year, more in some cases. The downside: That's slower growth than more conventional real estate investments have been experiencing in recent years. Still, in Illinois, prime farmland now sells for about $4,000 an acre and has been rising at a healthy 8% annual clip, spurred by proximity to Chicago.

Since investors often have no interest in actually running the farms and ranches they own, banks and trust companies charge a fee to manage it for them. As an example of what investors are paying, JPMorgan charges fees between 7% and 10% of the gross revenues generated by a ranch or farm.

Not all investors are buying strictly for the profit potential. In Texas and the Southeast, in particular, investors are buying ranchland for recreational purposes, either because of a stream or pond for fishing, or for deer and quail hunting. That trend has largely taken shape in the last three or four years, and high demand has pushed prices for recreational ranch land up about 10% a year in some places.

The cost of buying ranches and farms depends largely on location and use. Midwestern cropland fetches roughly $2,500 to $3,000 an acre, says Walt Richburg, the national director for farm and ranch management at JPMorgan's Private Client Services. Texas ranches can be had for as little as $400 an acre. But a financially viable ranch of, say, 500 cows may require 10,000 to 12,000 acres. A profitable farm, meanwhile, can require much less acreage.

In general, investors are spending between $500,000 to more than $1 million for some of the smaller properties, and substantially more for bigger operations. While those with much smaller pockets are also buying up parcels as small as 10 to 20 acres -- and at prices that are affordable -- "they're not doing it to create cash flow," says Mr. Richburg. "They're just buying for the enjoyment of a little place to go."

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