Farmland: Is it Currently Priced as an Attractive Investment?

13 Pages Posted: 15 Apr 2020

See all articles by Timothy G. Baker

Timothy G. Baker

Purdue University - Department of Agricultural Economics

Michael Boehlje

Purdue University

Michael R. Langemeier

Center for Commercial Agriculture

Date Written: October 2014

Abstract

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.

Keywords: Beta, cyclically adjusted P/E ratio, farmland prices, inflation hedge, S&P 500 returns

Suggested Citation

Baker, Timothy G. and Boehlje, Michael and Langemeier, Michael, Farmland: Is it Currently Priced as an Attractive Investment? (October 2014). American Journal of Agricultural Economics, Vol. 96, Issue 5, pp. 1321-1333, 2014, Available at SSRN: https://ssrn.com/abstract=3574190 or http://dx.doi.org/10.1093/ajae/aau037

Timothy G. Baker (Contact Author)

Purdue University - Department of Agricultural Economics

West Lafayette, IN 47907-1145
United States

Michael Boehlje

Purdue University

Michael Langemeier

Center for Commercial Agriculture ( email )

610 Purdue Mall
West Lafayette, IN 47906
United States

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