Is farmland a good inflation hedge?

By Halderman

09 /14 /20

One thing that is unchanged during the pandemic is that people need to eat. And in order to eat, farmers have to grow the food and the food delivered to its final destination. It seems intuitive that farmland — especially high-quality farmland with good access to distribution nodes and population centers — would be an excellent long-term investment.

If you are an investor or a farmer considering acquiring farmland, it is important to understand whether farmland is a good inflation hedge. An inflation hedge is an investment that tends to outperform other investments during volatile times, like pandemics. Sometimes, an inflation hedge is a “flight to safety.”

Historically, gold is the most common inflation hedge investment. Investors tend to flock to gold during crises and drive its price higher. Currently, gold is trading at very high price levels due to the COVID-19 crises. Farmland is another asset that is finding favor as an inflation hedge.

Indeed, farmland is negatively correlated versus the Dow Jones Index and is positively correlated with the CPI (consumer price index). When viewed through these lenses, farmland is arguably the absolute best hedge against inflation. In addition, farmland earns an annual income, which gold does not.

Following a consistent run-up in value from the 1980s through 2014, overall farm real estate values declined during 2015 and 2016. Values trade today in a narrow channel remaining steady since 2016.

Factors that impact farmland value

While it helps to understand the national picture when it comes to farmland value, macroeconomic trends don’t always tell the whole story. Local, farm-specific factors are equally important when looking at farmland values and work together with macroeconomic, “big-picture” factors to impact prices. One obvious consequence of this is significant, inter-regional variation in the price of farmland, even among those with equivalent soil quality and amenities.

Broadly, macroeconomic factors include:

  • Short- and long-term interest rates, i.e., the yield curve.
  • Supply of farmland for sale.
  • Cash yield this year!
  • Returns available to investors from alternative investments.

Local, regional and farm-specific factors include:

  • Soil quality.
  • Government subsidies.
  • Access to population centers and shipping nodes.
  • Other amenities.

Farmland compared to gold as an inflation hedge

One fascinating thing about farmland is that it is an inflation hedge like gold. It is the classic investment that most people think of when they want to insulate themselves from the reduced purchasing power of currency due to inflation. However, it is subject to more price volatility than farmland and generates zero annual income.

If you are considering investing in farmland, one thing you should understand is that it requires much more market knowledge and due diligence than buying gold. Since farmland is by definition local, you or your advisors should have knowledge of the soil quality, trading history, markets and general aspects of farm operations and management that relate to the specific location and region you are considering. You should also work with a farmland appraiser to determine the right price and a farm manager to assist with leasing decisions, record-keeping and other duties.

Perhaps the most compelling reason to consider investing in farmland is that there is a fixed supply of it, especially good-quality farmland. Over time, supply-constrained investments tend to hold their value extremely well, particularly assets that provide essential needs like food.

Since 1930, Halderman Real Estate and Farm Management has been advising farmers and investors regarding investing in farmland. We stay close to the market and have local and regional knowledge to help guide you to success. Contact us for more information.