Inflation and Farmland

Anxiety over inflation has crept into musings by economists, market observers, and the media. The uneasiness stems from conditions seemingly fertile for an inflation spike. Consumers are sitting on piles of cash, presumably itching to spend when they can. Congress recently passed another stimulus package, sending another $400 billion directly to consumers in the form of stimulus checks adding to the cash on hand.

The Federal Reserve changed its policy last year hinting it would accept periods of higher inflation before taking action to mitigate. And, recent forecasts boosting economic growth are all stoking the inflation fear.

Perhaps the most noticeable effects of inflation on agriculture are on input prices and interest costs. But inflation also affects returns to farmland. The nexus of inflation and returns to farmland is the focus of a paper by Dr. Bruce Sherrick, director of the TIAA Center for Farmland Research at the University of Illinois. The traditional view is that farmland returns are positively correlated with inflation. When inflation goes up, so do farmland returns, meaning farmland can be a good hedge against inflation. Sherrick’s paper examined whether this relationship still holds.

Figure 3, taken from Sherrick’s paper, plots average farmland returns since 1970 in 32 agriculture-predominate states along with the inflation rate. Farmland return is defined as rental income plus capital appreciation minus property taxes, divided by the initial value. Sherrick notes a couple interesting features in Figure 4. First, farmland returns were positive in almost every year over the period. The only years with negative returns were the mid-1980s and again in 2009. Annual returns to farmland over the period averaged 10.2 percent. In fact, Sherrick found returns to farmland outperformed most other assets like equities and bonds over the period. Second, the returns to farmland exceeded inflation in nearly every year, again the only exceptions being the years noted above. And, the spread between returns and inflation remained mostly constant, although narrowing some over the past few years.

Figure 3. Farmland Returns vs. Inflation (CPI)

Source: The relationship between inflation and farmland returns, Bruce Sherrick, Ph.D., Director of the TIAA Center for Farmland Research and Fruin Professor of Farmland Economics, October 2020.

Sherrick concludes the traditional view—returns to land are positively correlated to inflation—still holds. Sherrick states, “In a broad set of empirical examinations presented herein, those relationships appear to still hold across a large set of conditions, time periods, and treatments of holding intervals.” It would appear that farmland remains a good investment and the threat of higher inflation in the future shouldn’t alter that.