Premium
Farmland: Is It Currently Priced as an Attractive Investment?
Author(s) -
Baker Timothy G.,
Boehlje Michael D.,
Langemeier Michael R.
Publication year - 2014
Publication title -
american journal of agricultural economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.949
H-Index - 111
eISSN - 1467-8276
pISSN - 0002-9092
DOI - 10.1093/ajae/aau037
Subject(s) - economics , inflation (cosmology) , portfolio , earnings , investment (military) , monetary economics , cash , cash flow , agricultural economics , financial economics , finance , physics , politics , theoretical physics , political science , law
Farmland prices have risen dramatically in recent years, which has attracted interest from the broader investment community. At the same time, concern is being expressed regarding another bubble in farmland prices. This paper studies and compares the farmland price to cash rent ratio (P/rent) with the price to earnings (P/E) ratio of stocks. We find that the farmland P/rent ratio has reached historical highs and is currently at the level of the P/E ratio of the S&P 500 during the tech bubble. Data from 1911 to 2012 are used to estimate the beta of farmland, a measure of the risk that farmland adds to a diversified portfolio. The beta is found to be very low over this period. Farmland returns are also regressed against expected and unexpected inflation, and we find that farmland moves relatively close to one‐to‐one with inflation. We also report 10‐ and 20‐year holding period returns for farmland and find that the relationship between return and the cyclically adjusted P/rent ratio is strongly negative. Moreover, the current cyclically adjusted P/rent ratio is extremely high, indicating a reason for caution when investors are considering farmland purchases.