It’s been a year since I last published about investing in farmland. So I thought it would be good to revisit how farmland investment has fared during the heart of the pandemic and new opportunities ahead.
I am a fan of owning different types of real estate to build and maintain wealth. With stubbornly high food prices, my investing mind naturally thought of farmland.
In short, the investment arguments for investments in agricultural land have become stronger. Here are some insights from FarmTogether, a leading farmland investment platform and sponsor of Financial Samurai.
The current state of the economy
The end is in sight for COVID-19. However, the pandemic has left an indelible mark on the financial markets and the economy that will be felt for years, if not decades.
An estimated 9.4 million small businesses were closed temporarily or permanently during the pandemic. And 68.9 million Americans were laid off, resigned or were laid off in 2021. In addition, 75% of companies experienced supply chain disruptions last year.
These supply chain problems, coupled with an influx of money into the economy through various COVID-19 relief accounts, have contributed to soaring inflation. The 12-month change in the Consumer Price Index rose to 8.5% in March 2022, the highest inflation rate since 1981.
Despite 6.4 million jobs being created in the United States by 2021, Americans have begun to cut back on consumption and are likely to continue to cut back if inflation continues.
To help curb inflation, the Federal Reserve has begun raising interest rates for the first time since 2018. Economists now expect as many as nine rate hikes and possibly a 3% Fed Funds Rate by the end of 2023 if inflation remains stubbornly high.
Meanwhile, the war in Ukraine has consequences for world markets. Food prices are rising due to a shortage of fertilizer and exports from Russia and Ukraine. And the average price of regular gasoline is about $4.13/gallon, $1.27 more than a year ago.
Farmland performance in uncertain times
Despite what feels like a constant economic rollercoaster, farmland yields have remained strong. From 2020 to 2021, net agricultural 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 level since 2013.
In addition to strong operating income, land values remained stable. From August 2020 to August 2021, average company values increased by 7%. Meanwhile, commercial real estate prices fell 6% from April 2020 to April 2021.
Source: NCREIF Farmland Index, Quarterly Return Data
Adjusted for inflation, total cash receipts in real dollars received in 2021 were the highest since 2014. Furthermore, total cash receipts for all commodities are expected to reach $461 billion in 2022, approximately 29 billion (+6.7% ) higher than last year.
Source: USDA Economic Research Service, Cash Receipts by Commodity
Unraveling the success of farmland
Time and again, farmland has proven itself as a stable asset, diversification tool and reliable inflation cover in times of turmoil. This time it is no different.
COVID-19 and the invasion of Ukraine have created uncertainty in the financial markets.
From 1992 to 2021, the correlation of farmland to equities was -0.6, meaning past farmland performance was unaffected by broader market indices. Farmland’s low correlation to nearly 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 safe haven within traditional 60/40 portfolios — are becoming increasingly risky. The bond market has had the largest YTD take-up in decades so far. Meanwhile, agricultural land values have continued to rise in the first three months of 2022.
High correlation with inflation and US farmland value
Given that increases in crop prices are driving inflation, the value of U.S. farmland has historically been about 70% correlated with the consumer price index (CPI).
With inflation hitting record levels, investors are increasingly attracted to offerings that tend to keep pace with inflation. Commodity indices, for example, have performed exceptionally well over the past five periods of higher inflation.
Not all assets are equally affected.
Real assets, including farmland, typically have higher return potential, historically lower volatility, and higher Sharpe ratios than intangible assets, such as stocks.
Consider the peak-to-depth sell-off of the S&P 500 in response to COVID-19. Investors caused the S&P 500 index to fall by 30.75% in just one month. While the rise of fintech platforms like FarmTogether has made farmland more liquid, the asset class is not prone to widespread sell-off.
In fact, farmland is meant to be a long-term asset. For example, agricultural land has historically experienced much lower volatility than traded assets. In general, longer holding periods generally provide better returns and less stress for investors.
Recent global events have further enhanced the scarcity value of agricultural land.
Many are investing in Bitcoin given its scarcity. According to Business Insider, about 18.8 million of the maximum 21 million coins have already been mined. Bitcoin’s value has risen with limited supply and increasing use.
The same can be said of agricultural land. 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 that an estimated 250 million hectares of agricultural crops could be lost by 2050.
On the demand side, there is more need for arable land than ever before. From 2000 to 2018, the annual consumption of food and agriculture increased by 48%. That is more than double the growth of the world’s population in the same period.
By 2050, farmers will need to produce an estimated 60% more food to meet the current growth rate. As diets evolve towards healthier options, such as fruits and nuts, this demand will only increase.
Historically, this declining supply and increasing demand have protected farmland from volatility. Agricultural land has produced positive annual returns every year since 1991. Meanwhile, the average value of commercial real estate has risen for almost two years since 2007.
Investing in farmland through FarmTogether
The past year has taught us that no one knows what the future holds. 2022 has been a difficult year for equities so far, especially for growth stocks with high valuations.
By comparison, it’s been an exciting time for farmland and, in turn, the investment manager who has made it more accessible: FarmTogether.
FarmTogether leads the industry by providing unparalleled access to institutional-grade farmland through a range of products, including crowdfunded farmland offers, 1031 swaps, bespoke sole proprietorship offers and most recently their Sustainable Farmland Fund.
With the closure of their first winery, Vista Luna Organic Vineyard, FarmTogether’s portfolio now has more than $180 million in assets under management.
FarmTogether recognizes the growing importance of agriculture and its impact on the environment, as well as the increasing demand for ESG principles among investors, and has also taken significant steps to increase its commitment to sustainability.
In January, the company announced that 100% of its acres are certified through Leading Harvest’s Farmland Management Standard, an innovative certification that aims to drive large-scale U.S. agriculture toward sustainable practices.
Would you like to know more about FarmTogether and its range? Go to FarmTogether.com and see if farmland is right for your portfolio.
This post Looking back a year and new opportunities ahead
was original published at “https://www.financialsamurai.com/farmland-investing-year-in-review-opportunities/”