Farmland Versus Gold: A Comparative Analysis

July 08, 2022
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This article was originally published April 15, 2019 and updated July 8, 2022.

Two of the world’s oldest and most valuable asset classes are gold and farmland, and they share many similar features that investors find attractive to this day. Interestingly enough, investing in farmland has been largely overlooked in modern times.

However, it could literally pay dividends to take a closer look, as farmland has historically outperformed gold investments in almost every way.

This article examines gold and farmland investment performance through the following lenses:

Quote from Warren Buffett explaining the value of farmland investing vs another asset like gold

Historical Asset Class Returns and Volatility

While gold has appreciated in value over time, it has also resulted in losses over 30% in a single year.

On the other hand, farmland has created positive combined annual returns every year for the last 20 years, as farmland investments typically make money from cash rents paid by tenant farmers every year on top of any appreciation in land value.

When comparing the overall cumulative returns of gold and farmland, there has been a clear winner. Not only has farmland offered higher returns than gold on average, it has offered lower volatility, as shown in the chart below.

Source: NCREIF, Bloomberg, Bankrate, NYU Stern School of Business, Federal Reserve Bank of St. Louis and AcreTrader calculations. All returns are estimates and assume reinvestment of dividends. This data reflects the period 12/31/1990 - 12/31/2017.

In addition, farmland returns do not correlate with stock market returns, so it can add true diversification to a standard investment portfolio.

Winner: Farmland

Hedge Against Inflation

To be fair, gold investments are less about "return on your money" and more about "return of your money".

Concerns over currency inflation and deficit spending have been some of the main reasons people invest in gold, especially during the last recession.

If you are not familiar with the term, an inflation hedge is an investment used to protect one’s purchasing power as the value of currency decreases and the price of goods increases.

Because gold maintains a worldwide market demand, its value is not pegged to any particular currency. So as the value of the U.S. Dollar decreases, the relative value of each ounce of gold typically increases.

This is especially true during times of economic instability and recession, as investors tend to flock towards more stable assets.

Inflation acts upon farmland values a bit differently. Commodity food prices are more sensitive to inflation than any other type of good.

Inflation leads to rising food prices and commodity futures, which increase the cash rent rates that farmers are able and willing to pay landowners. Increasing cash rents typically lead to increased land values as well.

While gold has served as an effective inflation hedge, farmland values (as reported by NCREIF starting in 1991)have historically tracked inflation much more closely, with a 70% correlation with the Consumer Price Index (CPI) and a 79.84% correlation with the Producer Price Index (PPI).

No other asset class tracks this closely to these two main measures of inflation.

For this reason farmland has offered consistent historical returns while proving to be a more effective hedge against inflation.

Winner: Farmland

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Recurring Income Opportunity

As a non-producing hard asset, gold does not generate any income throughout the holding period.

Whatever financial gain you hope to make is contingent on someone else paying a higher price when you go to sell it.

With farmland investments, you not only stand to gain from the appreciation of the land itself, but you can also earn additional income from the food crops it produces year after year.

This is a unique advantage of farmland investments over gold.

We are certainly not saying that gold holds no value over time.

However, compared to farmland, gold has appreciated at lower rates and offers no potential to earn an annual cash yield throughout the holding period.

Winner: Farmland

Favorable Supply and Demand

Acting further upon farmland values and gold values are the laws of supply and demand.

While gold can be found in abundant supply relative to its demand, the supply of farmland has been steadily decreasing, even as the global demand for food continues to grow.

The global supply of gold has continued to rise by just over 1% annually, according to The World Gold Council.

Each year global gold mining adds approximately 2,500-3,000 tons to the overall above-ground supply.

As the demand for gold increases, the profitability of mining operations increases, thus you will typically see gold production increase as well.

As you can imagine, the value of each ounce of gold can be diluted as the supply increases relative to demand.

Comparatively, we see in the chart below that farmland has been decreasing in supply as the population grows and as more land continues to be developed for other purposes.

This trend is only expected to continue as previously outlined in our look at global farmland supply projections to 2050.

United States has the most arable land use per person compared to other global producers

When you factor in the increasing food demand projections and limited farmland supply, the laws of supply and demand are clearly in favor of long-term farmland investing.

Winner: Farmland

Investment Barriers

While farmland is often viewed as “gold with yield,” buying and managing farmland as an investment requires significantly more industry knowledge than acquiring and holding a roll of American Gold Eagles from a precious metals dealer.

In order to maximize investment returns from farmland, you must be able to identify the right opportunities, ensure it is managed properly, and build relationships with great tenant farmers and local operators.

We started AcreTrader to simplify this process. We help investors identify and participate in quality farmland investing opportunities while removing the headaches of management and administration.

Winner: Gold (before AcreTrader)

Final Thoughts

Both gold and farmland provide investors attractive ways to diversify their portfolios, and both should be considered to achieve a balanced asset allocation.

While investments in gold and farmland can both provide portfolio diversification and inflationary hedges, farmland has clearly outperformed gold over time while providing many of the same benefits in a more attractive way.

If you have never considered investing in farmland for portfolio diversification, now may be the time.

Additional Note: The information above is not intended as investment advice. Data referenced herein is sourced from Bloomberg, NCREIF, and the TIAA Center for Farmland Research at the University of Illinois, with additional calculations and analysis performed by AcreTrader. Past performance is no guarantee of future results. For additional risk disclosures regarding farmland investing and the risks of investing on AcreTrader, please see individual farm offering pages as well as our terms and conditions.

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