The latest inflation figures from the U.S. are quite alarming, with a 9.1% increase. The U.S. Bureau of Labor Statistics has also reported that food prices have risen by 10.4% year-on-year, with grocery prices up by 12.2%. This inflation is eating into our purchasing power, but we don’t have to just sit back and take it. We can find ways to benefit from it.
About 65% of Americans own their homes, so they’ve actually benefited from housing inflation. Energy prices are a bit trickier to profit from unless you invested in energy stocks early in the year. Thankfully, energy prices have been decreasing since June. However, food inflation is likely to persist due to long-term supply and demand imbalances.
One way to deal with food inflation is to eat less. Considering that we Americans tend to overeat, maybe higher food prices could help us get healthier. But what might happen is that we’ll switch to cheaper, less healthy foods. Personally, I’m trying to eat the same foods, just 20% less, because I want to lose 5-10 pounds.
Another strategy to combat food inflation is to invest in farmland. I’ve been looking into this with FarmTogether, a leading farmland investing platform. I wanted to understand how farmland investments have performed during periods of high inflation.
There are three main reasons why prices are rising, especially in farming, food, and agriculture:
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The Economy Was Intentionally Stimulated: During the first year of the pandemic, the U.S. issued over $5 trillion in government stimulus, equivalent to about 25% of the country’s GDP in 2020. The Federal Reserve focused on keeping unemployment low, which quadrupled the M1 money supply since the start of the pandemic. It’s estimated that 3% of inflation in 2021 was directly related to the Federal Reserve’s monetary and fiscal support during the pandemic.
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Supply Chain Disruptions Are Driving Prices Up: Shipment delays worldwide due to lockdowns, worker shortages, and slow port turnaround times caused by the COVID-19 pandemic are causing ongoing supply constraints for farming inputs like microchips, fertilizer, and farm equipment parts. This directly impacts farmers and the global agricultural food supply.
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Global Conflict Is Disrupting Supply And Demand: Russia’s invasion of Ukraine has added to inflationary pressure. Both countries are major suppliers of commodities. As a result, certain foods are becoming harder to find and more expensive due to their scarcity.
Investor portfolios can be affected by inflation in different ways. Public equity performance usually drops when inflation exceeds 4%. Fixed-income securities traditionally experience negative impacts from high inflation. On the other hand, some assets, like Series I government bonds and real estate investments, tend to perform well during periods of inflation.
Farmland investments can also benefit from rising inflation. Since 1990, farmland has yielded positive real returns, with increases in both land valuations and commodity prices. When inflation is high or rising, farmland investments can benefit. This is due to the increasing scarcity of farmland and the growing demand for food. By 2050, it’s believed that the world’s population will be 2.2 billion higher than it is today, meaning farmers will need to produce up to 70% more food than they do today.
When you invest in farmland, you gain exposure to two main sources of returns: 1) Appreciation in the value of the land itself and 2) annual income from the operations of the farm via rental payments and crop sales. Generally speaking, when commodity prices increase, investors tend to benefit.
Real assets offer distinct advantages for investors during periods of high inflation. Unlike traditional assets, like stocks and bonds, real assets have the potential to experience greater growth during times of inflation. This is due to the continuous (or increased) demand for the underlying asset, such as farmland.
Institutional investors and high-net-worth individuals like Bill Gates have been buying farmland for decades. Now, through FarmTogether, a farmland investment manager, the barrier of entry for farmland has been lowered. Investors can seamlessly acquire fractional or sole ownership of institutional-quality farmland opportunities across the U.S. Through FarmTogether, it’s now easy to invest in a historically stable and inflation-hedging asset class.
