It’s been a year since I last touched on the topic of investing in farmland. Given the ongoing pandemic and the new opportunities that have arisen, I thought it would be a good time to revisit this subject. I’ve always been a proponent of owning a variety of real assets to build and protect wealth. With food prices remaining high, it’s only natural that my investor’s mind would turn to farmland.
In short, the case for investing in farmland has only gotten stronger. Here are some insights from FarmTogether, a leading platform for investing in farmland real estate, and a sponsor of Financial Samurai.
The economy is still reeling from the effects of COVID-19. While the end of the pandemic is in sight, its impact on financial markets and the economy will be felt for years, if not decades. An estimated 9.4 million small businesses were temporarily or permanently closed during the pandemic. And 68.9 million Americans lost their jobs in 2021. On top of that, 75% of companies experienced supply chain disruptions last year.
These supply chain issues, along with the influx of money into the economy through several COVID-19 relief bills, have contributed to rising inflation. The Consumer Price Index 12-month change rose to 8.5% in March 2022, the highest inflation has been since 1981.
Despite the creation of 6.4 million jobs in the United States in 2021, Americans have started to cut back on consumption and will likely continue to do so if inflation persists. To help curb inflation, the Federal Reserve has begun to raise interest rates for the first time since 2018. Economists are now expecting as many as nine rate hikes and potentially a 3% Fed Funds Rate by the end of 2023 if inflation stays stubbornly high.
Meanwhile, the war in Ukraine is impacting global markets. Food prices are rising due to a shortage of fertilizer and Russian and Ukraine exports. And the average price of regular gasoline is roughly $4.13/gallon, up $1.27 from a year ago.
Despite these uncertain times, farmland returns have remained strong. From 2020 to 2021, net farm income increased by an average of 25.1%. The United States Department of Agriculture expects net cash farm income to rise again in 2022 to its highest levels since 2013.
In addition to strong operating income, land values remained steady. From August 2020 to August 2021, average farm values increased by 7%. Meanwhile, commercial real estate prices dropped 6% from April 2020 to April 2021.
Adjusting for inflation, the total cash receipts in real dollars received in 2021 were the highest since 2014. Further, total cash receipts across all commodities are expected to reach $461 billion in 2022, roughly 29 billion (+6.7%) higher than last year.
Time and time again, farmland has proven itself as a stable asset, diversification tool, and reliable inflation hedge through times of turmoil. This time, it’s no different.
COVID-19 and the Ukraine invasion have caused uncertainty across financial markets. From 1992 to 2021, farmland’s correlation to equities was -0.6, meaning the performance of farmland has not historically been impacted by broader market indices. Farmland’s low correlation with almost all conventional assets, including bonds, has provided investors with welcome diversification.
With interest rates rising as officials attempt to curb inflation, bonds – long considered the go-to safe-haven within traditional 60/40 portfolios – are becoming increasingly risky. The bond market has so far had its largest YTD drawdown in decades. Meanwhile, farmland values have continued to increase during the first three months of 2022.
Given that increases in crop prices tend to drive increases in inflation, the value of U.S. farmland has historically been about 70% correlated with the Consumer Price Index (CPI).
With inflation reaching record levels, investors are increasingly attracted to offerings that tend to move in lockstep with inflation. Commodity indexes, for example, have performed exceptionally well during the past five periods of higher inflation.
All assets are not impacted equally. Real assets, including farmland, tend to have higher return potential, historically lower volatility, and higher Sharpe ratios than intangible assets, like stocks.
Consider the peak-to-trough S&P 500 sell-off in response to COVID-19. Investors drove the S&P 500 index down 30.75% in just one month. Though the emergence of fintech platforms like FarmTogether has made farmland more liquid, the asset class is not prone to widespread sell-off.
In fact, farmland is intended as a long-term hold. Thus, farmland has historically experienced much lower volatility than traded assets. In general, longer holding periods tend to provide better returns and lower stress for investors.
Recent global events have further improved farmland’s scarcity value. Many invest in Bitcoin given its scarcity value. According to Business Insider, roughly 18.8 million of the maximum 21 million total coins have already been mined. Bitcoin’s value has risen with limited supply and increasing usage.
The same can be said of farmland. In 2021, the United States lost 1.3 million acres of farmland due to urbanization, desertification, erosion, and other climate change-related events. As climate change intensifies, research shows an estimated 250 million crop-production acres could be lost by 2050.
On the demand side, there’s a larger need for arable land than ever before. From 2000 to 2018, the annual consumption of food and agriculture increased by 48%. That’s more than twice the world’s population growth rate during the same timeframe.
By 2050, it’s estimated that farmers will need to produce 60% more food to meet the current growth rate. As diets evolve toward healthier options, such as fruits and nuts, this demand will only become more severe.
This decreasing supply and increasing demand have historically protected farmland from volatility. Farmland has produced positive annual returns each year since 1991. Meanwhile, the average farm real estate value has increased all but two years since 2007.
This last year taught us that no one knows what the future has in store. 2022 has been a difficult year for stocks so far, especially growth stocks with high valuations.
In comparison, it’s been an exciting time for farmland and, in turn, the investment manager making this asset more accessible: FarmTogether.
FarmTogether is leading the industry in bringing unparalleled access to institutional-quality farmland through a range of products, including crowdfunded farmland offerings, 1031 exchange, sole ownership bespoke offerings, and most recently, their Sustainable Farmland Fund.
With the closure of their first wine property, Vista Luna Organic Vineyard, FarmTogether’s portfolio now exceeds $180 million in assets under management.
Recognizing the growing importance of agriculture and its impact on the environment, as well as the increasing demand for ESG principles among investors, FarmTogether has also taken significant strides to advance its commitment to sustainability.
In January, the company announced that 100% of its acres have been certified through Leading Harvest’s Farmland Management Standard, an innovative certification aimed at driving agriculture toward sustainable practices at a large scale across the US.
Interested in learning more about FarmTogether and its offerings? Head over to FarmTogether.com and see if farmland is a good fit for your portfolio.
