The latest U.S. inflation figure came in hot at 9.1%. Below is the official June inflation data by the U.S. Bureau of Labor Statistics. Overall, food prices were up 10.4% YoY with “Food at home” (groceries) up 12.2% YoY.
Although elevated inflation is eroding our purchasing power, we don’t have to just sit there and let inflation beat us up like a captured spy behind enemy lines. Instead, we can find a way to slip away and potentially profit from the enemy.
The majority of Americans, ~65%, own their primary residences. Therefore, the majority of Americans have benefitted from housing inflation.
Energy prices, on the other hand, are harder to benefit from unless you bought energy stocks at the beginning of the year. Thankfully, energy prices have been rolling over since June. And maybe the war in Ukraine will finally end. But food inflation will likely be stickier thanks to long-term supply and demand imbalances.
One way to combat food inflation is to eat less. Given we Americans tend to eat too much, maybe soaring food prices might actually help us get in better shape. Alas, what may end up happening is substitution towards cheaper foods, which may be less healthy. Personally, I’m trying to eat the same foods, but 20% less as I’d like to lose 5-10 pounds anyway.
Another way to fight food inflation is to invest in farmland. Let’s get some insights by FarmTogether, a leading farmland investing platform and Financial Samurai sponsor. I wanted to understand how farmland investments have historically done during high inflationary periods.
Three Factors Causing Food Inflation
There are three major explanations for why prices are rising, particularly regarding farming, food, and agriculture.
1. Monetary Supply Intentionally Stimulated The Economy
During the first year of the pandemic, the United States issued over $5 trillion of government stimulus, equivalent to roughly 25% of the country’s GDP in 2020. When the American Rescue Plan Act was approved in March 2021, more than 90 million stimulus payments were already sent to Americans.
The Federal Reserve prioritized keeping unemployment low. As a result, the M1 money supply has more than quadrupled since the start of the pandemic.
With more money in circulation, it’s estimated that 3% of inflation in 2021 was directly related to the Federal Reserve’s monetary and fiscal support during the pandemic. According to Pew Research, inflation has doubled in 37 of 44 major countries globally compared to Q1 2020, just prior to the start of the pandemic.
2. Supply Chain Disruptions Are Driving Input Prices Higher
Shipment delays – both on the ground and at sea – are happening worldwide. This is all a result of lockdowns, worker shortages, and slow port turnaround times caused by the COVID-19 pandemic. This summer, shipments leaving the port of Shanghai took 74 days longer than average to reach the United States.
Meanwhile, railroads are overwhelmed with services from select California ports, experiencing an average wait time of 8 days. These shipping delays are causing ongoing supply constraints for farming inputs like microchips, fertilizer, and farm equipment parts, which directly impacts farmers and the global agricultural food supply.
Most modern farming equipment, including combines, tillage tools, planters, and tractors, now need microchips to operate. As a result, 45% of U.S. farmers said their farming machinery acquisition plans had changed due to tight inventories. This is even preventing some from investing in more efficient equipment altogether.
Furthermore, diesel prices were 75% higher in May 2022 than the year prior. After spiking 80% in 2021, fertilizer prices have risen an additional 30% since the start of 2022.
Farmers are also facing challenges on the distribution side. From 2020 to 2021, shipping pallets doubled in price. As the costs to both produce and distribute food increase, consumers are feeling the impact. The USDA expects broad food prices to increase between 7.5% and 8.5% in 2022.
3. Global Conflict Is Disrupting Supply And Demand
Russia’s invasion of Ukraine has only compounded inflationary pressure. In fact, the Federal Reserve estimates that 1.3% of inflation is due to the conflict.
Both countries act as major suppliers of commodities. Russia is responsible for 30% of the world’s grain exports while Ukraine exports an average of 6 million tons of agriculture each month.
As a result, since the start of the war, the World Trade Organization decreased its 2022 forecast of imports and exports by 1.7%. As the world’s production, export, and supply of certain commodities decline, certain foods are becoming harder to come by and more expensive due to their scarcity.
The greatest reason for elevated inflation is a rise in energy prices as you can see below and in the detailed chart above. Thankfully, energy prices have been coming down almost every day since the beginning of June 2022. Therefore, the next inflationary print should be lower. However, food inflation will likely continue to be elevated.
Investor Portfolios and Inflation
While every period of inflation is different, let’s take a look at the historical performance of some of the top asset classes.
Public equity performance has historically dropped when inflation exceeds 4%. From 1979 to 2021, the Russell 2000 Index’s return was nearly 50% lower during periods of higher inflation compared to lower inflation.
Fixed-income securities traditionally experience negative impacts from high inflation. Stricter monetary policy through higher interest rates, in an attempt to quell inflation, tends to drop bond prices as yields become more attractive.
This means bonds also tend to lose their diversification characteristics during times of inflation. Historically, when high inflation lasts at least three years, the correlation between stocks and bonds is strongest, meaning both assets might experience lower returns.
Alternatively, some assets actually tend to perform well during periods of inflation. For example, Series I government bonds, which are tied to price indexes, are currently paying record yields.
Meanwhile, real estate investments, which capitalize on rising prices, tend to fare well during inflation. Rent prices have increased 40% in some major U.S. cities year-over-year. Therefore, holding onto your rental properties in a high inflationary environment makes sense.
Farmland Returns During Rising Inflation
Farmland investments can also benefit from rising inflation. Since 1990, farmland has yielded positive real returns, enjoying jumps in both land valuations and commodity prices.
Hedging Against Inflation Through Farmland
When inflation is high – or when it begins to rise – farmland investments can uniquely benefit. Let’s explore the factors driving farmland’s superior role as a historically strong inflation hedge.
Agriculture Supply And Demand Traditionally Stabilize Land Values
Historically, farmland has offered a reliable store of value. In fact, from 2007 to 2021, nationwide average farm real estate values across the U.S. declined only twice. In 2021, farmland values were up 8% across the board.
This stable growth is largely driven by farmland’s increasing scarcity. Between 1992 and 2012, almost 31 million acres of agricultural land were irreversibly lost to development. In 2021 alone, the U.S. lost 1.3 million acres. As the supply of arable farmland (already a finite resource) declines, the value of farmland should only continue upwards.
Simultaneously, the demand for food is increasing. By 2050, studies believe the world’s population will be 2.2 billion higher than it is today. This means farmers will need to produce up to 70% more food than they do today.
In other words, farmers will need to produce more while using fewer resources. High-quality farmland that is well suited to sustain this long-term demand should maintain, if not grow, its value over time.
Together, the forces of supply and demand offer strong tailwinds for this asset class and its investors.
Farmland Income Tends To Move In Lockstep With Rising Prices
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. After all, commodities make up a large portion of the Consumer Price Index, the metric used to measure inflation. Historically, farmland returns have held a correlation of 70% to the Consumer Price Index and an even higher correlation (nearly 80%) to the Producer Price Index.
In May 2022, global food prices increased 29% year-over-year. The Bloomberg Commodity Index increased 20% just in the first two quarters of 2022. Farm inputs, like fertilizer, chemicals and diesel, reached all-time highs during this same time frame.
Yet, commodity prices kept pace with rising expense costs. As a result, research predicts farmers will have positive margins.
Real Assets Have Previously Outperformed During High Inflation
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.
Agricultural products, for example, are a necessity, no matter the economic environment. This stable demand has also resulted in real assets having lower historical volatility than traditional assets.
From June 1991 to March 2022, a blend of real assets outperformed global equities by 4.6% during periods of rising inflation.
Farmland: The Accessible Food Inflation Hedge
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.
FarmTogether specializes in row and permanent crops, with over 40 active properties across the U.S., offering investors a wider variety of options to suit their unique needs.
Interested in learning more? Visit FarmTogether.com and see if farmland is a good fit for your portfolio.
You can also own one or both of the Farming REITS, LAND or FPI. I have owned both, made money – capital gains and monthly dividends. I’m out for now but looking at FPI again. I can wait for a better price once this recession and inflation begins to quieten down. Inflation doesn’t hurt these farmland owners; however, the cost of capital does, so interest rate matter to all REITs. I now own a Medical REIT (GMRE) and an Industrial REIT (STAG) plus a full-on REIT ETF (FREL) to participate in the REIT sector. They are just a few of my holdings in three portfolios.
That sounds great.
I am a Non Accredited Investor who “an individual income in excess of $200,000” who also is only in my 20s and does not have a net worth “of at least $1,000,000” so I am stuck.
I would totally lie where it not for the legal environment and the lose of an investment.
Looks like I am stuck with NASDAQ:LAND and NYSE:FPI and therefore can’t say only invest in farmland that is near the great lakes and in the north (due to temperature).
I could check out “AcreTrader, FarmFundr, FarmTogether, Farmland LP, Harvest Returns, and Steward” but I expect most won’t let me in.
I could try out Real Estate Investing
“I represent that my investment(s) in this offering(s) does not constitute more than the greater of 10% of my gross annual income or net worth, either individually or in the aggregate.” -https://fundrise.com
I need 50K, I am sitting at 25K +-10K.
-Wait until I have an income from a job of a serious amount. I am in Cybersecurity, which pays well with experience.
Paul Lutes says
Grain prices have historically been cheap. At the height of the 70’s inflation, the price of wheat hit a peak of $5.72/bushel. In June, it hit $9.24.
That is an annualized increase of 1%.
“The majority of Americans, ~65%, own their primary residences. Therefore, the majority of Americans have benefitted from housing inflation.”
I disagree. Housing went up because the value of money went down due to currency devaluation as a result of quantitative easing/money printing; there is no net increase in wealth for home owners (only the illusion of more wealth). Moreover, if you sell the home and want to buy another house in the same neighborhood those houses have gone up to a similar extent so how exactly did the home owner benefit?
Sure. Homeowners benefitted by their home equity increasing. Everything is relative. We are comparing how the relative benefit of a homeowner and a renter.
You are only neutral real estate if you only own one home because you have to live somewhere. That is true. But you are short real estate if you are renter and lose if home prices and rents go up and vice versa.
You are only long real estate if you own more than one property. You can sell for a profit, raise rents, etc.
Money is only a means to an end. I’d much rather own real assets that improve the quality of my life.
Do you rent or own? And if you rent, how has rising home and rental prices affected you?
“Do you rent or own? And if you rent, how has rising home and rental prices affected you?”
Neither – I rent and own.
I rent where I work in a coastal area of the US where real estate prices are ridiculously overpriced and not in-line with the fundamental value of what you get relative to elsewhere. So, I short the local market where I work. Furthermore, I own a beach front home outside the US that I currently use as my vacation home. With the growing acceptance of remote work my plan is to either 1) move to my vacation home and work remotely or 2) outright retire and live in the home eventually.
I know that you are very bullish on US real estate however an equal case can be made for renting in the US especially in overpriced regions. I have always been able to find a rental property below the going market rate. A fair number of landlords are not terribly good small business owners and fail to price their property appropriately.
Financial Samurai says
OK, so you rent. All good.
Check out my BURL real estate investing strategy.
Canadian Reader says
I’m fighting back with batch cooking and cross border shopping. When I compare prices, Canada has been managing quite well- even with its protected dairy policies. I thought things were coming down a bit last month, but July seems high again. So far, my efforts have reduced our annual family grocery budget by 15% and restaurant costs by 8%.
Portion control, I still eat whatever I want (mostly) but it seems to have to be a smaller amount all the time. Takes a lot of the fun out of being at a point in life when I can afford the money to eat anything I want — just can’t afford the calories. Square that and square it again for alcohol.
The logic of, I eat, therefore I should own some food production makes a certain sense. I used the same logic when I realized, about 8 years back, how much I was spending at Amazon, just as I was selling my old house to move in with my wife; so that’s where I put all the money from the sale. Lord knows, I’ve never regretted that investment. I still kick myself for not throwing caution to the wind when, in 1999, I said to myself, dang, I should buy a bunch of this Amazon stuff, even if they are still losing money every year.
I’ll look into this Farm thing, but I’m still a bit skeptical of things like REITs and such and institutional farmland for the masses (as opposed to Bill Gates) will require some serious checking, and maybe a longer track record than it had time to build as of yet.
Maybe I’m old fashioned, but avoiding the newest greatest things like crypto, and investing in China and Russia, hasn’t exactly hurt me.
Moving to California really made me appreciate farms and fresh produce so much more than before.
I think it’s cool farms are using more technology to improve output and maximize resources. Must be big upfront costs because the machinery is so expensive.
Good idea on eating less to control costs and getting healthier at the same time!
Nancy Zebracki says
So glad you said to eat less to save money. We eat way too much. My uncle was so healthy he always said ‘eat enough to cover the bones’. Good advice from both of you