To be fair, the latter two might be partially artificial due to the limited price observation during market panics, as farmland is not really traded at public markets. As demand for agricultural products increases and the supply of arable land suited for agriculture declines, farmland increases in value. From private equity over cryptocurrencies to classics like commodities, a wide variety of other asset classes have gained prominence. After several years of stagnation, it seems that stars align right now for another likely upcycle in farmland prices. Farmland has proven to be a popular investment in recent years. However, it is subject to more price volatility than farmland and generates zero annual income. As they employ leverage gains in land prices will be amplified by holding FPI. I wrote this article myself, and it expresses my own opinions. I have no business relationship with any company whose stock is mentioned in this article. More recently farmland has proven to be a steady but by no means stellar performer with reasonable real returns. Finally, I will discuss how to best get exposed to farmland as a retail investor and what my preferred vehicle would be. While one could consider farmland as just another real estate asset, there are several fundamental differences that sets it apart from the broader real estate category: Farmland produces food. This article is intended to be used for educational purposes only and in no way constitutes investment advice or a recommendation to invest in any securities or other assets. While buildings are generally in need of regular refurbishments, many tracts of farmland can be used for long periods with only limited Capex. This makes intuitive sense as farmland is a very long-term asset. Farmland and gold are two of the worlds oldest asset classes. Any investment in any stock mentioned could result in a 100% loss. Therefore, as rates increase, farmland returns tend to drop. Unfortunately, options are very limited. It indexes the price of everyday consumer goods like bread and milk, as well as common costs like municipal water bills and sales tax. This is especially true for row crop farmland or pastures.
While farmland has performed well historically, more recently, it would have been a drag on a more equity-focused portfolio in terms of total returns (while still providing good diversifaction benefits). However, more recently, other asset classes have made their entrance. While there might be an inital negative effect of higher rates, it tends to be countered by increased rental payments over time. By using this website, you accept our Terms of Use and Privacy Policy. Right now, I prefer FPI over LAND. And in order to eat, farmers have to grow the food and the food delivered to its final destination. As one can clearly see, not only does farmland have the second highest annual return after listed real estate, but also by far the lowest negative return of all non-fixed income asset classes, as well as the lowest standard deviation. Inflation happens when the average price of goods and services increases rapidly. It, therefore, makes an excellent addition to most portfolios. Megan Blankenship grew up in the rural Arkansas Ozarks in a family of small farmers. A significant component of farmland total return is capital appreciation. Unfortunately, I only know of two listed REITs that specialise in farmland. Farmland has a positive correlation with inflation and is considered a classic inflation hedge. The famous 60/40 portfolio is testament to this approach. As one can see, cropland values have been fairly steady in recent years and only really gained momentum last year. I am not receiving compensation for it (other than from Seeking Alpha). This is most apparent for wheat prices. It does not get more basic than this. Farmland Partners in a nutshell (Farmland Partners IR presentation). Thus, while one can now invest in individual properties on some sites like FarmTogether, I would argue that from a portfolio point of view, a broader more diversified investment makes more sense. Corporate Communications, Inc. https://www.chicagofed.org/publications/agletter/index. On the other hand, fixed income is looked at with their respective rate one can expect to earn when holding to maturity and not based on price movements that should most likely show bigger drawdowns. Check if your university has an FT membership to read for free. Tags used by Seeking Alpha like "buy", "sell", or "hold" are not an invitation or recommendation to do so but only signal my personal view on a stock and are required by Seeking Alpha for the article to be published. Farmland is an attractive long-term investment that offers current income, capital appreciation, an inflation hedge and favorable diversification that is negatively correlated with traditional asset classes. There may still be plenty of money within the economy, but it wont buy as much as before. The prices of the main agricultural commodities also shot up after Russia invaded Ukraine as both countries are major exporter of agricultural goods.
PPI figures work the same way as CPI. Put simply, inflation is a general rise in prices over time. One of the main attractions of owning farmland is its defensive property as a portfolio diversifier and long-term inflation hedge. Get the latest in farmland investing and selling farmland. Looking at how farmland returns were over the last 50 years and how that compares to CPI paints a much rosier picture: farmland return spread vs. CPI (Oct. 2020 study by Bruce Sherrick, Ph.D, Director of TIAA Center for Farmland Research). All investments involve risk and could result in loss. Two main principles of inflation hedging are. Readers and investors should do their own research and seek investment advice before investing. This should help overcome the negative headwinds from rising rates. Therefore, idiosyncratic company risk is unavoidable when chosing to go down that route which is why I recommend adding those stocks as an addition to a well-diversified portfolio rather than a major standalone investment. I am not receiving compensation for it (other than from Seeking Alpha). This can have a major impact on liquid investments like stocks, cash, savings accounts, etc. Because national and even global economies are interconnected, prices tend to rise or fall all together over time. Even if corn or wheat farmers struggle, almond farmers might thrive and vice versa. None of the information contained on this website is a recommendation to invest in any securities. Row crop farmland has consistently produced cash income of between 4% and 8%. This could counter the negative valuation effect on farmland. (https://www.chicagofed.org/publications/agletter/index). Farmland has proven to be a high return asset class that exhibits low correlations with other asset classes. Might it rather be at risk from rising rates? Economists have several theories about how inflation actually happens, but they all describe the same basic cycle. Overall, it seems that on its own, farmland is an excellent asset class with high returns, low downside risk and low volatility. From the table above, it seems that the inflation hedge properties of farmland have been declining over time. 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While this data ends August 2021, more recent data points indicate continued momentum. Gladstone Land (LAND) on which I recently wrote an article and Farmland Partners (FPI) on which I plan to write a more in detail article. This again might be slightly different for permanent plantings where leases also tend to be longer term and need more of a committment. entrance. Enter your email address into the form to be the first to know about all things Halderman, from upcoming property auctions to advice from our blog. Opinions and judgements can always be wrong. farmland real returns (Oct. 2020 study by Bruce Sherrick, Ph.D, Director of TIAA Center for Farmland Research). Alas, individual stock risk remains. Infrastructure assets and real estate are part of this class. While inflation is a normal part of a functioning economy, extreme inflationary conditions can have negative consequences across the spectrum, from businesses to individuals, from the most to the least experienced investors. But still, farmland was able to produce inflation beating returns during all periods. Rather, it indicates an average of a broad seta basket, as the Bureau of Labor Statistics terms itof prices of common goods and services within an economy. This article gives a basic introduction to inflation, how it works, and how its measured and managed within the U.S. economy before diving into common methods of hedging against inflation for long term portfolio stability. But even in more recent periods, the main characteristics remain: more recent performance of farmland (Oct. 2020 study by Bruce Sherrick, Ph.D, Director of TIAA Center for Farmland Research). Countless factors, such as supply of and demand for raw goods, globalization and technological advancement, and monetary policy, drive prices and influence inflation. The investment style was strongly fundamentally driven but also with attention to newsflow and upcoming catalysts impacting stock prices short term. Inflation risk is never far from an investors mind, and theres a lot that thoughtful investors can do to protect their assetswhats known as hedging against inflation. Other initiatives like Biden's proposal to allow the sale of E15 this summer only add to the favourable backdrop. I write my personal independent views and hope to enter fruitful discusssions in the comment section..As I have always been intrigued by the dynamics of the broader economy and stock markets in particlular I am personally invested in the stock market since my youth for over 30 years now. Due to compliance reasons I will however refrain from explicitely writing about concrete experiences gained during my career and will limit my contributions to publicly available information while drawing upon my experience from my diverse background in the financial industry.
I recently sold out of Gladstone Land on valuation grounds and invested in FPI. Firstly, maintaining a diverse portfolio is an essential principle of investing in all economic conditions. It is therefore suited as a strategic portfolio component that helps preserving one's buying power in the face of rising inflation over the medium to long term. Is there evidence for such a behaviour? Similar to many retirees that look for consistent returns to fund their living expenses, endowments are tasked with a similar challenge. Why this interest in farmland specifically? Unlike with real estate, there is nearly always someone to take on a land lease for a planting season and grow produce on a piece of good farmland. Since 1930, Halderman Real Estate and Farm Management has been advising farmers and investors regarding investing in farmland. This provides portfolio stability during volatile markets while enhancing a portfolios risk adjusted return. Farmland might be more negatively impacted by rising rates than I foresee or maybe rising input costs, in terms of fertilizers and gasoline, pressure farmers more than anticipated impacting their willingness to accept rent increases. Additional disclosure: I am an independent individual investor that shares his personal views based on publicly available information. Following a consistent run-up in value from the 1980s through 2014, overall farm real estate values declined during 2015 and 2016. Thus, individual farmland performance might deviate a lot from the average which makes it all the more imperative to invest in a fairly broad portfolio of farmland assets to capture the defensive characteristics of the asset class. If you are considering investing in farmland, one thing you should understand is that it requires much more market knowledge and due diligence than buying gold. Therefore, I do expect political support for farmers to continue for the foreseeable future which also limits some of the underlying volatility of farming. Please disable your ad-blocker and refresh. Real trouble arises when inflation builds its own momentum, leading to: Once upon a time, hedges worked as fences, keeping livestock in and predators out. The Federal Reserve Bank of Chicagotracks farmland values and their research shows that land values in the 7th District (IL, IN, MI, WI, MI & IA) appreciated an average of 6.4% yearly from 1965-2019. Values trade today in a narrow channel remaining steady since 2016. This doesnt mean the price of any one particular good or service. Please consult with your legal and financial advisors before investing and do not invest unless you are able to sustain the risk of loss of your entire investment. Higher than the 0.65 of the first table, even though it covers the same time period. An inflation hedge is an investment that tends to outperform other investments during volatile times, like pandemics. Currently, gold is trading at very high price levels due to the COVID-19 crises. According to my estimates, at $14.50 FPI currently trades at around the fair value of their land holdings, which means one can get access to a large diversified farmland portfolio, without having to pay a premium. While some neighbourhoods become unfashionable, retail properties are at risk from e-commerce, or cinemas are impacted streaming and COVID restrcitions, food will always be in demand. Ideally, your total investment portfolio stays healthy even as particular segments experience natural ups and downs. Whereas in the more recent time frame from 1991 onwards, correlation to CPI is barely positive at 0.15. While Yale was mostly known for their exposure to private equity, they also invest in what they call real assets. Join over 300,000 Finance professionals who already subscribe to the FT. Then $69 per monthNew customers onlyCancel anytime during your trial. Local, farm-specific factors are equally important when looking at farmland values and work together with macroeconomic, big-picture factors to impact prices. This is supported by increases in farm income as shown by the Minneapolis Fed for the 9th district: Farmer's income in 9th district (Minneapolis Fed). Things never stay the same. 2022 | All Rights Reserved Interestingly, it also exhibits a negative correlation to US-listed real estate. Famously, Yale under David Swenson has been pioneering branching out to non-traditional asset classes with huge success. There I learned to appreciate the importance of capital structures when analyzing investments which is still often ignored by investors. This makes some sense as the 1970s were a spectacularly good period for farmland as the Soviet Union opened up its markets and farmers took on leverage to consolidate their farms and reap the benefits of scale. To ensure this doesnt happen in the future, please enable Javascript and cookies in your browser. It has been around for often more than one hundred years and might be around for ages. Thats inflation. Investing always has risks attached to it. For reference, the average household income in 1900 was $450 a year. In this position I was responsible for developing international regualtion as well as supervising specific companies. Given the limited space of an article, it should not be considered a complete discussion of all relevant factors and risks. Ceres Partners LLC | FPI is thinly traded and occassionally swings around wildly during the day. Local, regional and farm-specific factors include: One fascinating thing about farmland is that it is an inflation hedge like gold. Unlike many of the other inflation hedges, farmland also serves an economic purpose and generates regular income. The other most frequently referenced metric in the U.S. is the Producer Price Index, or PPI. AcreTrader, Inc. is not a registered broker-dealer, investment adviser, or crowdfunding portal under Regulation CF. Learn why investors are increasingly turning to land as a portfolio diversifier and a hedge against inflation. Is this happening to you frequently? All investments involve risk and may result in loss. When viewed through these lenses, farmland is arguably the absolute best hedge against inflation. Just to be clear: this means owning farmland and leasing it out to farmers and not operating a farm as a business. analyse how our Sites are used. I/we have a beneficial long position in the shares of FPI either through stock ownership, options, or other derivatives. for a number of reasons, such as keeping FT Sites reliable and secure, Above performance data is as always only true for the aggregated asset class. This gave me invaluable insights into companies that is otherwise very hard to get. Jackson County farmers experienced the sharpest decrease in land values in Minnesota during this period, with prices falling nearly 54 percent, from $1,991 to $921 per acre. For U.S. investors, as inflation erodes the future purchasing power of each dollar, financial assets are prone to Land prices dropped by 50% in some areas: The average value of farmland per acre in Minnesota fell nearly 40 percent from $1,165 in 1982 to $700 in 1987. Historically, portfolio construction has been about equity vs. bonds. It is the classic investment that most people think of when they want to insulate themselves from the reduced purchasing power of currency due to inflation. Unfortunately, not only produce prices soared but also input costs like fertilizer or gasoline did. In fact many investors view it as more favorable than other hard assets such as gold because farmland produces positive cash flow while shielding from the deleterious effects of inflation. Investors can build resilience by maintaining a well-diversified portfolio that contains assets known to be resistant to inflationary pressures. We use Adding farmland to a diversified portfolio should reduce its volatility and drawdowns while not really lowering its expected returns. Here, we still see high standalone returns, low downside risk and low correlation to other asset classes, although not quite as negative with regards to stocks as before. In addition to direct farm cash rents, ancillary sources of income include hunting leases, billboard rents, timber sales, oil & gas royalties and an emerging revenue sourcewindmill leases. Therefore, it seems sensible to check the current backdrop on farmland or more specifically, cropland (i.e., no pastures) as that is what we can buy with the farmland REITs, which I will discuss later on as my preferred way of investing in farmland. While a certain level of inflation is good for a healthy economy, too much or too quick of a rise can spell trouble for the value of investors assets. Therefore, please make use of limits. farmland a near zero vacancy asset (Farmland Partners investor presentation). In some of the top performing regions, land prices seem to have jumped by more than 20% last year. As such, farmland seems to be able to conserve one's buying power very well. Inflation measures serve as a good indicator of how much people are paying for everyday necessities. Benefit from providing food for the people - what could feel better?
Due to this experience I also learned how to read between the lines and know very well that messages are made for a specific audience and therefore need to be taken with a grain of salt. Just like with real estate, publicly listed companies that own large tracts of farmland would make an ideal investment vehicle due to this reason. Prices have now reached the levels they had ten years ago. If you are an investor or a farmer considering acquiring farmland, it is important to understand whether farmland is a good inflation hedge. But also in a portfolio context, farmland performs exceptionally well. The big farm crisis in the 80s lead to many bankruptcies and foreclosures. As many retail investors use REITs as a proxy for real estate, this highlights why farmland should be seen as not just another real estate investment, but rather as a distinctive asset sub class whose properties deviate from the standard real estate asset.
