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Successful farmland investment is in some respects tied in with food prices as higher food prices push up the value of the farm land that produces the raw product for us to consume. Variance in the demand for food commodities is low which means that consumers absorb higher food prices (are prepared to pay a little more when the price of food rises) and in turn make sacrifices in other areas of expenditure.
Food price inflation has been higher than overall inflation in the past few years, meaning the price of a loaf of bread has risen proportionally more than say, an item of clothing. In China for example food inflation was almost triple background CPI inflation between 2007 and 2008. With the price of food commodities rising, those who have chosen to invest in farmland and hold the asset that produces the food will enjoy price inflation in their asset too. We have already witnessed this in the first quarter of 2010 in the UK, with the Royal Institute of Chartered Surveyors indicating a price rise of 5.4% year to date for UK farm land.
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So the question remains, is there room for further inflation in food commodity prices, and thus further room for growth in the value of farmland and profit for the strategy of investing in farmland?
When adjusted for inflation, current agriculture commodity prices remain lower than previous highs. This, along with the factors already mentioned in this article, implies that there is a significant amount of room for further increases in agricultural commodity prices, and with them, farmland values. Corn is US$ 3.5 /bushel currently (July 2009) compared to US$ 16/bushel (inflation adjusted) in 1974. Wheat is US$ 3 /bushel currently compared to US$ 27/bushel in 1974.
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So in real terms, food remains cheaper than ever with huge room for growth, and along with that price inflation (which we are seeing right now), we see inflation in the value of the underlying asset, farmland, which begs to be good news for the farmland investor.
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