June 04, 2019
Low Commodity Prices and the Upside Case for Farmland
For the last four years, stock prices have risen to new heights, while commodity prices have remained depressed. The decline of farm net income and cash rent rates along with commodities has left farmers worried and news outlets wringing their hands. So why buy farmland now?
Two reasons come to mind: timing and opportunity.
Most investors will wait to see an actual shift in the market before making a move, but the time to reallocate capital is often before the rotation in funds begins and everyone else has begun trading. Profitably moving from one asset class to another can be less fruitful once the market shifts.
This last-minute behavior is one reason many investors choose to hedge with highly liquid assets like gold during a stock-market downturn, despite the fact that farmland offers many advantages over gold. It takes time and planning to deploy capital into farmland and other forms of real estate, and investors often wait too long to do so.
Warren Buffett summarized this problem well when he said, “Be fearful when others are greedy and greedy when others are fearful.”
Historical Comparison of Equities and Commodities
The chart below shows the price ratio of the S&P 500 Index versus the Goldman Sachs Commodity Index (GSCI). This index is at its lowest level in 50 years and well below its median, suggesting equities are historically very expensive relative to commodities. Inversely, this would suggest commodities (and thus farm rents) appear undervalued relative to the stock market.
The index does not suggest an impending decline in the stock market per se, but it does suggest the relationship between commodities and equities is far out of alignment and that an eventual reversal is likely. This could occur with or without any correction to stock prices.
It seems just a matter of time before commodity markets and equities correct toward a more historically-normal relationship. When the market shifts in favor of commodities again, cash rent rates and farmland values should react positively over time.
Despite the recent history of depressed commodity prices, land sales prices have mostly held steady, which would suggest there is already a persistent, high level of interest from buyers. Given the growing global demand for food and shrinking amount of farmland per capita, the long-term case for investing in farmland investment opportunities appears solid.
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Data referenced herein is through April 2019 and is sourced from Investing.com with additional calculations and analysis performed by AcreTrader. Past performance is no guarantee of future results. For additional risk disclosures regarding farmland investing and the risks of investing on AcreTrader, please see individual farm offering pages as well as our terms and conditions.
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