Farmland/Agriculture is attracting more investors, here is why

5 minutes reading

Summary

  • Overexposure to traditional bonds and stocks in the investing space.
  • In today’s world of high inflation, low rates, expensive valuations, and global uncertainty traditional investing options are risky
  • Improve the risk-to-reward of your portfolio by investing a portion in farmland.
  • A safe haven to hedge against inflation 

In today’s markets, most individual investors continue to invest primarily in equities and bonds. While this investment strategy may have been lucrative well in the past, the future has become unpredictable.

Stocks are priced at historically high valuations in face of a raging pandemic, geopolitical uncertainty, high inflation, and rising rates.

Historic P/E ratio of the S&P500 (multpl.com)

Bonds are to a large extent even worse as they are valued at a guaranteed negative real return. Even following the recent spike, the yield of the 10-year treasury is just 2%, which is far below recent inflation highs that have exceeded 7.5%:

Data by YCharts

As seen in the evidence above, the future ROI prospects of stocks and bonds don’t look bright. The world-renowned hedge fund manager, Ray Dalio, alarms us that we could face a lost decade with ~0% annual returns. Even worse, according to Jeremy Grantham’s famed 7-year projection, with negative returns across the board:

7-Year Asset Class Forecast: 3Q 2021 (GMO)

This may sound like fear-mongering, but the reality is that lost decades tend to happen every 5-10 years, and we are long overdue for one to occur:

History of lost decades (GMO)

The combination of increased inflation, high valuations, a worldwide pandemic, higher rates, and growing geopolitical uncertainty is a threatening scenario for stocks and bonds.

This helps to explain why alternative investments have become so popular in recent years. Alternative investments can be anything other than stocks and bonds.

Commercial real estate, infrastructure, and cryptocurrency are among the most prominent alternative asset classes today, but there are numerous lesser-known alternatives that aren’t getting enough attention.

Agriculture is the most obvious example that comes to mind

Many legendary investors have invested substantial amounts in agriculture and yet, most individual investors have never considered the option.

Today, Bill Gates is the biggest individual farmland owner in the USA.

Warren Buffett often uses farmland as an example to highlight a strong investment.

Michael Burry, the man behind the movie “The Big Short,” has stated in previous interviews that the little investing he does these days is primarily focused on agriculture and water. “Oh, I don’t want to disclose that,” he says when asked how much he is investing in agriculture. “But it is a significant amount at this point.”

So what’s so special about farmland and agriculture?

Reason #1: Strong Historical results & Attractive Future Prospects

Returns on farmland are generated by two main factors:

  1. The rent or the profit sharing with the tenant/operator.
  2. The increased value of the underlying asset.

When combined, these have historically yielded double-digit annual total returns. Farmland also provided superior returns with significantly lower volatility:

Farmland vs. stocks vs. bonds vs. REITs (Farmland Partners)

Reason #2: High Yield Potential

We live in a low-yield environment with stocks that pay as little as 1.5% yield and Treasuries manage barely more than that.

Farmland, on the other hand, can produce far higher yields depending on what you buy.

High-quality row crops with triple net leases may yield 3-4 percent, but some permanent crops, especially if you’re willing to take some development/operational risk, can yield up to 20%.

Yield level of permanent crop farmland with value-add potential

As Warren Buffett stated once, the yield will fluctuate from year to year, but on average, you will earn a higher yield compared to other investments.

Reason #3: The Ultimate Inflation protection

Agriculture and farmland are arguably two of the best inflation hedges on the planet. They are absolutely necessary for the human race’s survival and prosperity and irreplaceable. They also have a limited supply and always increasing demand. That helps to explain why food prices have consistently risen faster than inflation:

Fresh produce vs CPI (Gladstone Land)

Farmland values have historically had a strong correlation with the CPI, often rising even faster and yielding particularly higher returns during periods of high inflation.

Given how much money has been printed in the last two years, this is a safeguard I’d like to include in my portfolio.

Reason #4: Diversification to a Stock and Bond Heavy Portfolio

Farmland/agriculture allocation as insurance against black-Friday events.

Farmland has historically performed well during most crises. It is recession-proof by nature, and it is extremely difficult to lose money in the long run if you don’t use too much leverage and diversify properly.

Of course, this does not mean that farmland and agriculture are immune to bear markets, but they can provide valuable stability to a portfolio during periods of high uncertainty, such as today.

Many people would rather invest in gold (GLD), but in my portfolio, farmland and agriculture serve this purpose. Farmland is similar to gold in that it can be used as a hedge against economic downturns, but it has far superior other characteristics:

  • It has historically yielded higher profits.
  • It is a truly passive income
  • It has been a lot more stable.
  • It has proven to be a more effective inflation hedge.

Reason #5: Growing Democratization of Farmland / Agriculture

Last but not least, the farmland/agriculture market is still underserved today. Nevertheless, as more investors decide to include farmland in their portfolios, I expect prices to rise, providing significant upside to those who invest now.

20 years ago, allocations to alternative asset classes like farmland were only 5%. Today, it is already 25%, and by 2030, Brookfield (BAM) predicts that it could reach up to 60%:

3 thoughts on “Farmland/Agriculture is attracting more investors, here is why

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