A perfect economic storm appears to be brewing – a combination of high interest rates, inflation and low GDP growth is increasing the risk of another global recession. Farmland is one asset which can offer investors a long-term safe haven, even in such a volatile economic environment.

Historic farmland investment performance speaks for itself – over recent years it has been strong and consistent, outpacing inflation and remaining uncorrelated with other asset classes.

Farmland prices vs inflation

At the same time, economic conditions in the short term will potentially be the most severe since the aftermath of the financial crisis of 2008. Will farmland investment performance be dramatically changed as a result?

Initial indications appear as if this is unlikely to be the case. Global farmland prices rose by 28 per cent during 2008 (compared with falls of 38 per cent and 31 per cent on the S&P 500 and FTSE 100 respectively) with values also moving upwards in 2009. Inflation is also providing a tailwind – while prices of inputs have risen, prices of many key food commodities have experienced a similar upward movement. The disruption to cereal and oilseed supply chains in the Black Sea as a result of the Ukraine war has further lifted commodity prices, making producer margins very healthy.

But what of investor confidence? Are buyers of farmland likely to experience the same problems that buyers of other types of real estate have been suffering? These problems have centred around issues of affordability – caused by squeezed incomes and higher costs of borrowing – as well as uncertainty around the future direction of the market. Is there a likelihood that farmland buyers might suffer from the same issues and thereby push values downward?

Investment asset values can generally be dictated by two factors – the income generation potential of the asset, and the cost of capital. In theory, an asset is accurately priced if the income generated from it matches the annual cost of the capital required to acquire it.

One of the easiest examples to analyse is farmland in the US Midwest. Not only is the market one of the most liquid and efficient in the world, there is also one of the closest observed links between farmer income and land values, with virtually no competing land uses.

Actual vs implied farmland prices

Implied values based on farmer income and cost of capital are already reasonably well correlated with actual values, at 74 per cent correlation, indicating the lack of external non-agricultural drivers of land values. When a five-year moving average is taken, this correlation becomes near perfect, at 96 per cent.

This reflects the reality that farmers are long-term decision makers, and tend not to buy or sell land impulsively as a result of a single good or bad year. Purchasing and sale decisions are made rather on the basis of longer-term trends in the market. Since margins year to year are volatile, farmers view selling land in a bad year as increasing the risk of missing out on subsequent good years. As a result land prices are more stable, due to this longer-term outlook.

This volatility is also further tempered by the existence in the market of owners who lease farmland out, where income is often guaranteed through multi-year rental contracts, thereby providing another reason to hold rather than transact.

So is there any downside to farmland prices? There have indeed been years where farmland prices have fallen, however these falls have been generally a lot less steep than any price rises that have occurred. Long-term predictions around population growth, diet changes (with greater per capita calorie consumption and meat consumption forecast for the end of the century) and land availability constraints will lead to a long-term upward trend in commodity prices, farmer margins and – as a result – farmland values. Investors with a long-term outlook can benefit hugely from holding farmland assets within their portfolio.

Further information

Contact Jonny Griffiths

Spotlight: Global Farmland 2022