Farmland, More Precious Than Gold?

If you had to choose between investing in farmland or gold, which would you choose? Both have a rich history of producing generous returns, hedging inflation, and stabilizing portfolios.

For Warren Buffet, the answer is easy: “Call me crazy but I’ll take the farmland”.

A Brief History Of Farmland & Gold

Farmland and gold are both considered to be among the world’s oldest asset classes. Gold ownership traces back to 4000 B.C. when Eastern Europeans used it to make decorative objects. It wasn’t until around 1500 B.C. when gold first started being used as a medium of exchange for international trade. Today, most gold is used in jewelry-making, though it plays an important part in electronics, medicine, and aerospace.

Though land has always played a key part in societal growth, agriculture has only been around 10,000 years ago. Between the 17th and 19th centuries, the British Agricultural Revolution resulted in a dramatic increase in farming productivity. Meanwhile, the Homestead Act of 1862 helped spur the expansion of farms - specifically family farms - within the United States. It’s estimated that there’s just over 2 million family farms with almost 900 million acres of land today.

Farmland & Gold vs. S&P 500

Before we focus on just the alternative assets, let’s compare farmland and gold to the S&P 500 to understand their compelling nature. The S&P 500 typically moves independently of either of these two investment options. Gold holds a very slight positive correlation to the S&P 500. Meanwhile, farmland’s relationship is much lower and almost completely uncorrelated. Both alternative investment options are known as valid diversification options as they each counterbalance risks associated with equities.

There’s several drawbacks to the S&P 500 when compared to farmland and gold. We’ll specifically cover the volatility of farmland and gold later; for now, it’s important to note the S&P 500’s standard deviation of around 15% is higher than either alternative. This was evident during the 2020 recession as the financial markets’ worst day during the pandemic was on March 16, 2020 when the S&P dropped 12.7%. On that day, gold dipped less than 2%. Over the entire month of March 2020, commodities dropped around 3.5%.

The S&P 500 has also become increasingly reliant on its technology sector overachievers. Its 8 largest stocks hold more than 25% of the index’s total market capitalization, and the index’s reliance on the top 5 companies has reached levels not seen since the 1980’s. Although the index is still composed of the top 500 companies by market capitalization, the S&P 500 is a weighted index fund that discriminates favorably towards larger companies. The S&P 500’s centralized dependence currently makes it more vulnerable and less diversified than equity investors might believe.

Returns/Appreciation

Both farmland and gold can be great long-term investments. Amazingly, the two alternatives have returned almost the exact same return over the past 40 years. Between 1971 and 2019, gold provided investors an annual average return of 10.61%. Over the same period, commodities hold an average annual return of 10.69%.

At the start of the pandemic, gold was trading for around $1,700/ounce. Last year, gold had its strongest year in a decade, posting a return of over 24%, topping the $2,000/ounce threshold, and outperforming every equity class. However, gold has continued to struggle during 2021. At the time of writing, it’s down almost 7% year-to-date, and forecasts call for continual struggles into 2022. With real yields potentially increasing in the near future, the non-yielding asset of gold would become a less favorable option than other investments with assets that provide income.

Meanwhile, there were numerous reasons to be excited about farmland over the past 18 months. New government-enacted programs, the trade war with China, low interest rates, and high commodity prices all favored farmland. As a result, farm values increased 7% from 2020 to 2021. A survey in August 2021 resulted in 78% of farm managers believing farmland prices would continue to increase during the second half of 2021. In addition, a majority of commodity prices have experienced year-over-year double-digit price increases, providing substantial income returns.

Volatility/Stability

Although the average annual return for gold and farmland are similar, their path to those returns couldn’t be more different. Gold’s long-term standard deviation of 13.1% indicates high year-over-year variation. This is evident by large price swings - since 2013, gold has had multiple years of double-digit positive returns, multiple years of double-digit losses, and multiple years of near 0% annual price changes.

For farmland, it’s a different story. Farmland is traditionally known as a stable investment. Farmland has produced a positive return every year since 1991. Since 1971, Farmland’s standard deviation has been close to 9%. Even in the uncertainty surrounding the global pandemic, farmland held its value between 2019 and 2020. When investing for the long-term, gold and farmland will likely provide similar returns but have very different volatility profiles.

Supply/Demand

Another interesting area of comparison is the supply and demand of each asset. Estimating how much gold is left to mine in the world is a moving target. With advancing technology, it might be feasible in future years to extract certain reserves that might not be economically feasible today. However, rough estimates state about 20% of gold reserves (~50,000 tons) have yet to be mined. Gold mining production has appeared to flatline in the past few years, as 2019 marked the first time in over a decade that the amount of gold mined had decreased from the year prior. Expert forecasts call for moderate gold demand in 2022.

Alternatively, farmland continually decreases in supply. Since 2000, an estimated 11 million acres of farmland have been lost to urban development within the United States.  The U.S. Department of Agriculture’s National Laboratory for Agriculture and the Environment forecast the world will lose about 250 millions of crop-producing acres over the next 30 years. In addition to urbanization, there’s continually risk of soil degradation due to excessive tillage and other often utilized non-sustainable farming practices. In regards to demand, two-thirds of corn and soybean producers anticipate higher commodity demand resulting in higher yields in 2022.

Farmland vs. Gold - Inflation Hedge

Both farmland and gold have been touted as inflation hedges - but more evidence is stacking up in favor of farmland. Looking back at prior inflationary periods, gold crushed the high inflation period of the 1970’s, yielding average annual returns of 35%. However, gold had a negative return from 1980 to 1984 - during a period when annual inflation averaged 6.5%. Gold prices also dropped from 1988 to 1991 when inflation averaged almost 5%. During all three of these periods, commodities posted positive returns. Gold also has a surprisingly low correlation to inflation metrics, while farmland’s correlation is among the highest of any asset class.

There’s still some argument here in gold’s favor. Gold isn’t tied to any cyclical market cycle like agriculture or cultivating crops. Gold - especially when traded in an ETF or mutual fund - is more liquid and more easily transferable than other inflation-focused investments like farmland or TIPS. Gold still ranks among the best options in rising inflationary periods and performs best in the highest inflation environments. Still, since 1970, the correlation between gold’s year-over-year change in price and the U.S. CPI is only 0.157 - more than four times weaker than farmland’s correlation to inflation.

Two Strong Options, One Clear Winner

Farmland and gold are both intriguing investment opportunities. Each investment has the unique benefit of being a physical asset, and each has been around for thousands of years. While both investments have produced historical average returns greater than 10%, farmland is the less volatile, income-producing option that has a decreasing supply. In addition, farmland is statistically proven as the more effective inflation hedge.

Between these two very plausible investment options, there is a clear winner in our mind for which is the stronger alternative asset.