It’s been a year since I last published about farmland investing. Therefore, I thought it would be good to revisit how farmland investing has done during the heart of the pandemic and new opportunities ahead.
I'm a fan of owning various types of real assets to build and preserve wealth. With stubbornly high food prices, my investing mind naturally thought about farmland.
In a nutshell, the investment case for farmland investing has strengthened. Here are some insights by FarmTogether, a leading farmland real estate investing platform and Financial Samurai sponsor.
The Current State of the Economy
The end is in sight for COVID-19. However, the pandemic has left an indelible mark on financial markets and the economy that 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 got laid off, quit, or were discharged from their jobs in 2021. In addition, 75% of companies experienced supply chain disruptions last year.
These supply chain issues, coupled with an 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 6.4 million jobs being created in the United States in 2021, Americans have started to cut back on consumption and will likely continue to cut back on spending 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 much 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.
Farmland’s Performance During Uncertain Times
Despite what feels like a constant economic roller coaster, 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.
Unraveling Farmland’s Success
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.
High correlation with inflation and value of U.S. farmland
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.
Investing in Farmland Through FarmTogether
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.
Not sure if my post went through but please have a look at this article from Purdue University: https://ag.purdue.edu/commercialag/home/paer-article/increasing-concern-of-a-bubble-in-indiana-farmland-prices/
Its written by professors of Agricultural Economics.
Very interesting read!
My mother has farmland in Northern Minnesota that she inherited.
She grew up on a farm but moved to a big city after college and their family has just been renting out the farmland for decades rather than farming themselves.
Farmland Rents there have been steadily increasing over time.
I wonder how global warming will impact this in the future as well. For example her land is very fertile but has a short growing season due to colder weather. Of course we don’t want global warming, but it may actually favor some areas vs others for farming like colder climates.
The global companies responsible for developing the major crop seeds have long baked climate change – and the expected change in on-the-ground growing conditions – into their R&D process. They’re engineering seeds to, let’s say, be more drought resistant, pest resistant, or to favor soil conditions if the prime growing regions shift north over time.
They had me right up until the positive reference to “the increasing demand for ESG principles among investors”.
Sorry, out.
So true.
Companies need to make money, not advance social cause.
Stick to your core purpose.
If your core purpose is feeding people in perpetuity, how is sustainability not important?
This misunderstands ESG. The basic thesis of ESG in the investment context is that what is currently considered “material” information – that is what an investor would want to know to make an informed decision – is limited and should be expanded to include additional standard indicators of how a company performs.
While including ESG indicators in a short-term investment decision probably doesn’t make much sense, there is a good argument that suggests companies with strong environmental management and governance systems perform better in the long-term. There’s a reason the index fund managers or pension managers are interested in this topic.
I’ve represented 2 F50 companies with investors on ESG issues and I can assure you that when BlackRock, State Street, etc asked about ESG issues, it was NEVER in the context of social corporate activism, it was about how well management was managing. Corporate social activism is VERY different than ESG.
I’m with you 100%. Just sold all my Disney.
This could be the beginning of the end for big D.
Sensational article, FS! Putting my California Futurist hat on, the last water reservoir was built in 1980. Population then was 24 million. Population today is 40 million. New gas-powered vehicles phasing out by 2030, where will all those EVs get their electric charging from?
Water use, according to California Water Commission, is 50% environmental, 40% agricultural, and 10% urban. CA no longer wants agriculture in the state; just ask the farmers in the middle of the state, and think about it as you drive up and down the I-5/99, staring at the dusty flats (or look it up!). Imagine how much CA population growth could be supported by increasing urban water use from 10% to 20%. Where will all these people come from? Hmmm… The High Speed Rail project is stalled out, apparently the money has been spent acquiring Right-Of-Way; what could all that land right next to the I-5 be used for?
Get ready for lots of ‘fried worms’ and ‘grasshopper tacos!’ (both delicacies in Mexico, look it up!) Noodles, too. Tejon Ranch is nudging towards residential (19,000 zero-emission homes) and away from the cattle industry. May you live in interesting times!
(OT, but WSJ 4/19/22 has an article about 4% Rule maven Bill Bengen, and his new expectation of a 3.3% withdrawal rate for retirees.)
Really good to see Bill finally come around to my thesis! I no I will not get credit for my safe withdrawal rate formula and my recommended lower safe withdrawal rate for retirees. But I’ll always have this post about the topic and feel good about being ahead of the curve. Hooray!
Gladstone Land (LAND) is a pretty good one to check out. I bought this earlier in the year. It has been up 355% over the last 5 years and up 24% YTD.
Pretty impressive! Will look into it. Perhaps a great proxy for farmland real estate.
Why not just invest in farmland REITs instead of a private nonpublic investment? I am not saying FarmTogether is bad I just prefer more public options.
Sure. What are some farmland REIT options you have in mind? And what do you think are their strengths? I’m always open to learning about new opportunities. thx
Land and FPI are two stocks investing in farm lands. Land is over valued to me at this point, and I will not buy at the current price.
I would tend to agree on LAND. It has been a good investment for me but the low-30s is a better entry point now.
Dang, I can’t believe how well farmland has performed over the past couple of years. I wish I had invested more. But that’s always the case after a great run!
Just got to stay disciplined with proper asset allocation.
LAND and FPI are the current go to REITs for farmland. I don’t have one for what I call industrial farming ie using warehouses to grow crops but I think that is the next wave. Watching it closely. Currently in other REITs eg cell towers so I don’t have a recommendation for you.
Long-term and low volatility are big on my investment checklist and it’s nice to see more investment choices coming to market beyond ETFs. Farmland has performed better that I thought.
I was also surprised to read the statistic that farmers will need to produce 60% more volume by 2050 to keep up with the pace of demand. Wow that’s a lot. Food prices seem so high now but man they’ll probably be crazy high by then if supply doesn’t increase. I certainly hope the quality of produce won’t suffer.