The Case for Buying Farmland Versus Stocks

January 1, 2018 04:03 AM
Corn field

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.


Commodities Are Cheap Versus Stocks


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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Spell Check

Jordan, MN
1/2/2018 10:15 AM

  I completely disagree with the author of this article. Now is a terrible time to buy farmland even if commodities are low - the reason of course is farmland is still overpriced. If one looks at at the Rent-to- Price ratio (similar to a stock Price-to-Earning ratio), as was done in the article from Purdue found here: one will see that farmland is overpriced. I agree with Craig from NE, we are just entering the true correction phase for farmland.

Dimmitt , TX
1/2/2018 01:55 PM

  I have 200 acres for sale at $2250 an acre in the Texas panhandle if someone needs an investment!

Kearney, NE
1/2/2018 07:12 AM

  Given current commodity prices, land prices are at least 3 times what they should be. Baring a "Black Swan" type of event, commodity prices are going to stay range bound. Ultra low interest rates are keeping land prices from collapsing. Once farmers burn through all of their working capital, land prices will fall-a lot more than many believe. High land prices are a huge negative for a low margin industry like Ag. and things will eventually even out.


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