Farmland and Inflation at a Crossroads

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Farmland and Inflation at a Crossroads

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Michael Gunderson, PhD Blaine Nelson
JUL 08, 2021

SUMMARY

A sharp turnaround in economic conditions along with pent up consumer demand has led to a recent uptick in headline inflation. U.S. farmland values have historically moved relatively in tandem with inflation rates, which has prompted speculation that farmland values may soon move along a similar upward trajectory. However, the relationship between farmland values and inflation is complex, and several related factors can exert material influences on how farm values ultimately trend. Ultimately, the outlook for agriculture remains positive and we expect farmland values to strengthen in the near future.

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Inflation and Farmland Values 

A confluence of easy monetary policy and increased government spending to address the effects of the COVID pandemic have helped fuel a rise in inflation in the first half of 2021. Indeed, consumers are paying higher prices for a wide basket of goods as the U.S. Consumer Price Index increased 5 percent year-over-year in May.1 Agricultural commodity prices have also risen with annual crop prices reaching their highest levels in eight years in May while the price of lumber increased 326% year-over-year.2 Commodity prices have declined in recent weeks but concerns about rising inflation remain.

The prospect of higher inflation is boosting demand for real assets like farmland. Among the major asset classes, farmland has historically exhibited one of the strongest positive relationships with inflation (Figure 1). This is partially attributable to agricultural commodities influencing consumer prices. For example, an increase in commodity prices can simultaneously lift farmland values and the retail prices for goods derived from agricultural commodities. The strength of the relationship has varied through time as farmland values are driven by numerous factors beyond commodity prices. However, we expect the link between commodity prices, farmland values and inflation will hold in the coming years.