Why Robert Shiller Is Wrong On Farmland

by: Jussi Askola

Summary

Robert Shiller recently published a very bearish article on land and home investments.

The article was surprisingly misleading and the return calculations wrong.

The total return of farmland has been in excess of 10% from 1915 to 2015, not 1.1%.

Robert Shiller, professor of economics at Yale University and Nobel laureate, recently wrote an article entitled: "Why land and homes actually tend to be disappointing investments." It was published in The New York Times and has gained lots of attention as well as controversy from the investment community. The article is very bearish on land, farmland and residential investments and uses a widely unsophisticated analysis to come to conclusions. The data presented has certainly been very misleading to many who now must think that real estate investments should be avoided at all costs. It is yet another use of incomplete understanding and misleading statistics to support an economic conclusion.

The author fails to account for many aspects that would change the results completely and therefore I decided to write this article to give a more complete analysis.

Apparently, the key takeaway for many readers was that the returns have historically been low and that hence farmland must be a terrible investment. This misconception was caused by this statement within the article:

Over the century from 1915 to 2015, though, the real value of American farmland (deflated by the Consumer Price Index) increased only 3.1 times, according to the Department of Agriculture. That comes to an average increase of only 1.1 percent a year - and with a growing population, that's barely enough to keep per capita real land value unchanged. What all that amounts to is that neither farmland nor housing has been a great place to invest money over the long term.

There are so many misconceptions in this statement, that I do not know where to start. Let's first point out that Shiller is talking about real returns which means after inflation. Between 1915 and 2015, the U.S. experienced inflation at an average rate of 3.21% per year. The nominal capital appreciation per year would have hence been 4.2% per year according to Shiller's data. Since it is quite rare for any individual investors to discuss real returns when assessing historic returns, I think that this already leads to many misunderstandings.

Secondly, what sense does it make to look at the value appreciation of farmland during the early part of the 20th century when we were still only 2 billion people on earth? Farmland values increase when the price of the underlying produced commodity increase. In 1955 we were still only 2.7 billion and obviously it was no issue to feed only 2 or 3 billion people. It is therefore very normal that from 1915 till the '80s or even '90s the value appreciation was very low. The supply of farmland was still high relative to the size of the global population. It is only recently that the population has started to outgrow the supply. Today we are 7.4 B. It is quite understandable that feeding 2.7 billion is easier than 7.4 billion. The demand side is much larger today and is growing really fast. This is the reason why appreciation has been much higher in the last decades and it is only expected to get worse. We will be close 10 billion people by 2050 but the supply of farmland will not have materially changed. I explained the reasons for this in more detail in this article.

So by only looking at the return from 1915 till 2015, it does not consider demographic changes at all, which are crucial when accessing the future value growth of farmland. Looking at more recent value appreciation, let's say the last 30 years, would have given us more accurate data for assessing future potential appreciation. According to a study by Robert Shiller himself, farmland values rose by 748 percent from 1982 to 2012. Why not mention that in the article? Wouldn't it have been helpful when assessing potential returns? Instead the article says 1% annually.

Thirdly, Shiller does not even mention the fact that this value appreciation is only part of the story. A major component of farmland investment returns comes from the rent paid by the farmer. Historically yields have been as high as 10% during certain periods of time. Today, even in a very low interest rate environment, farmland still yields about 5% from rents alone. When combining both cash return plus value appreciation together, farmland has during long time periods achieved double digit returns, outperformed almost any other asset class, and done this with less risk and negative correlation.

And lastly, don't forget that farmland is a private and inefficient market compared to public markets. Farmland investors, including REITs, are very selective when allocating capital and are often able to acquire pieces of farmland that possess superior long-term upside and can with active management also increase the productivity of the land which creates additional value without even depending on the market.

Conclusions

The article misses the whole concept of real estate investment. In many cases the largest return comes from the rent, and moreover the value appreciation of real estate is very dependent on demographics. While I cannot predict the farmland returns of the coming years, I feel fairly confident that over the long run it is an asset class that will strongly benefit from many trends that could lead to us severely lacking agricultural commodities. In my last article: Is it too late to invest in farmland, I explain why I prefer to not try to "time the market", and suggest to slowly get positioned in this asset class for the long run.

I hope this article brought a more complete picture of farmland returns. The 1% return mentioned by Shiller obviously is not considering the most important aspects that make farmland a good asset for investment. Even by using Shiller's own data, if you add inflation and yield to the 1.1%, you would see that farmland achieved double digit returns from 1915 until 2015.

To end this article, I will just note that at Yale, Shiller is a supporter of Swenson, who has achieved an exceptional track record of investing Yale's endowment assets. Swenson allocates a large part of Yale's endowment fund into real estate and timberland which are not very different from farmland. So it would be nice if Shiller could explain why land investments are good for Yale, but not for his readers.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.