Stock prices continue to mark new highs. Consumer confidence is booming. Commodity prices are down with grain prices under the cost of production. Cash rents continue to decline with lower rents likely for 2018. And farmland values have been under pressure the past several years
So why buy farmland? It’s all about timing.
The time to reallocate financial assets is before a rotation in funds begins. Getting out of an asset class once the market shifts can prove quite difficult. And investing in an illiquid asset class such as farmland can be slow and difficult. That’s why investors normally move from stocks to gold and then back to stocks. Both offer easy entry and exit.
Farmland, however, offers consistent annual returns, which gold does not. In addition, farmland offers long-term appreciation, despite the current three-to-four year correction. Value investors might also favor farmland as an inflation hedge and a safe haven from a financial crisis.
The problem for investors is it takes time and planning to move funds into farmland. So rotating funds from equities to farmland requires plenty of lead time.
The index does not suggest a collapse in the stock market is imminent. The quantitative easing conducted by the Federal Reserve has distorted money flows and asset values, and the GSCI is heavily influenced by energy prices. But it does suggest the economic relationship between commodities and equities is well out of historical alignment and an eventual reversal is likely. The index says nothing about timing and it says nothing about how the ratio will return to its norm of 4.1. That could occur without any correction in equities, but through a rally in commodities, for instance.
While the “how” is unclear, the “what” is clear—commodities are historically underpriced compared with equities and unlikely to remain historically underpriced for long. Long-term investors read the index as a signal to start shifting funds into commodities and farmland.
The index also offers optimism to current landowners and farm operators. Plentiful global supplies of nearly all commodities account for the depressed prices. But the index suggests commodity prices eventually will recover as economic forces stimulate demand and trim supplies. With the index at a 50-year low, the trend in commodity prices going forward is more likely to be positive than negative relative to equities as we near the end of the decade.
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