As early as I can remember, every weekend my Dad took me and our German Shorthaired Pointer to visit our farm, about 25 miles east of our home in Moline, Illinois. He let our dog go crazy chasing, but never catching, all the critters. I listened and learned as he talked to the farmer about crops, seed varieties and the one topic all farmers talk about: the weather.
Thanks to my Dad, as an adult I have bought and sold farms in the Midwest and in Texas. Crop farms only, never livestock: I don’t invest in anything that eats, flies, floats or has wheels. Among the many reasons I own farmland, one stands out: it hedges against inflation.
Why farmland is an inflation hedge
Few people realize that in 2020 the Fed created more dollars than ever before. It is Economics 101 that too much money in circulation is a direct cause of inflation. A chart of money-supply growth from 1984 to mid-2020 (AdenForecast.com, August 2020) screams “inflation ahead!”
What that tells you is that if you keep your savings in dollars, you will get your head handed to you on a platter. You need inflation hedges, and in my view no other investment offers long-term protection against inflation with as many other advantages as farmland.
No investment correlates perfectly with inflation. But according to the TIAA Center for Farmland Research at the University of Illinois, farmland has a 70 percent correlation with the Consumer Price Index (CPI) and a 79.84 percent correlation with the Producer Price Index (PPI), the two main measures of inflation. That is the best correlation of any investment as far as I know.
Agriculture is our most important industry. When inflation pushes up the price of food, farmland becomes even more valuable. People always need to eat.
Long-term returns and diversification
According to fool.com:
“Over the last 50 years, the value of American farmland has risen by about 6.1 percent per year, with only five down years during that period. Add in the cash rent yields, and the return to investors has been even more impressive. Since 1991, farmland has produced a positive return every year, generating an average annual return of 11.5 percent, according to the USDA. To put that return into perspective, it has outperformed all other asset classes except the Dow Jones REIT Index during that time frame.”
Farmland also diversifies a portfolio, because it has little to no correlation with the performance of other asset classes.
Gold is a popular inflation hedge, and its single advantage over farmland is liquidity. But gold is extremely volatile, and it produces no income. Farmland combines low volatility, income and proven long-term appreciation. It has been called “gold with yield.”
Advantages over other real estate
- Unique among real estate investments, farmland never has a vacancy. It produces reliable income year after year.
- Unlike other real estate, there are several ways to increase the income.
- Professionally managed farmland is a passive investment.
- Farmland never needs maintenance (except irrigated farms, also known as money pits).
- Farmland can’t be trashed, burned down, vandalized or stolen.
- Property taxes are lower thanks to agricultural exemptions.
- Landlords never get calls from their farmer tenants to fix or replace anything.
The trade-offs: lower cash yield and a long horizon
Because farmland has so many advantages, a farm may not produce the annual cash return (not counting appreciation) that other investments offer. Owning a farm is not a way to get rich quick.
My farm manager, Ed Kiefer, who was voted National Farm Manager of the Year by his peers with Hertz Farm Management, cautions:
“The agriculture economy has always been cyclical. Farmland is a long-term investment; in my opinion, 10 years at the minimum.”
Ways to own farmland
A farm is a large investment. However, it is relatively easy to get favorable financing through the Farm Credit system. Another route is a sale-leaseback with the farmer who is selling.
Two less capital-intensive options are fractional ownership through a farmland fund, or shares of a REIT (real estate investment trust). The two publicly traded farmland REITs are Farmland Partners (NYSE: FPI) and Gladstone Land Corporation (NASDAQ: LAND).
Be aware that with a fund or a REIT, you trade a smaller investment for giving up control of your investment.
Why a professional farm manager matters
If you buy a farm, it is critical to work with a professional who knows the market and has the agricultural background to evaluate farms for sale. Unless you are experienced in managing farmland, hire a professional. Aside from the farm itself, a good manager may be the best investment you ever make.
Farmland gives you an asset you can walk on and enjoy owning: consistent passive income, the ability to adjust that income to market conditions, appreciation that has historically beaten inflation, low volatility, property tax exemptions, and no vacancies, maintenance or tenant problems. You have a renewable crop growing each year and the satisfaction of doing your part to feed the world. Plus, you always have a place to go far away from urban areas.
