This piece originally appeared in the Strategic Planning Group, as a Supplement exclusively for Members. It has been edited for content.
So recently, the New York Observer ran one of its snooty, fawning pieces about hedgies in New York.
Hedgies—hedge fund drones, essentially used car salesmen dolled up in Paul Stewart suits—are morons, for the most part; though they do display a certain rat-like cunning of the low-IQ variety.
That sharp-toothed rodent cunning was on display in the Observer story: These hedgies were boasting about buying farmland left and right, as a hedge against inflation.
So: Is farmland worth buying as a hedge against inflation?
This is a reasonable question.
Bottom line, the answer is: No.
The reason, however, is worth examining in some detail, because insofar as farmland is concerned, there would be a period of time when it is a clever investment, and then a point after which it would be a terrible investment. And as with everything in life, the dividing line between the terribly clever and the terribly stupid is as smeared and undefined as roadkill on an Interstate.
First off, farmlands produce agricultural commodities—which in an inflationary scenario would rise drastically in price. Thus one would think that owning farmland would be akin to owning a gold mine: A sure-fire hedge against inflation.
However, there are three caveats to this line of argumentation: One, farmlands—like any other bit of real estate—is dependent on credit. Two, the business of farming is cash-intensive, and requires sure-fire lines of credit in order to eke out razor-thin margins. And three, unlike industrial commodities or precious metals, agricultural commodities can spoil if they are not consumed; not all agriculturals spoil, of course, but enough that it affects the entire commodity class.
