5 Reasons Why Now Might Be The Right Time To Invest In Farmland
As the economy starts to open up post-Covid, financial analysts are waiting with baited breath to see whether widespread inflation materializes as many fear. While the Fed is seeking to reassure markets that it expects inflation to peak at 2.4% and remain short-lived, many investors are asking how they can prepare their portfolios for the worst.
Amid this uncertainty, it’s worth remembering that there are many alternatives to traditional stocks and bonds. One alternative investment worth considering is US farmland. Read on to discover 5 reasons why now might be the right time to consider investing in farmland.
1. Farmland is a natural hedge against inflation
Similar to gold, farmland is used by many investors as a natural hedge against inflation. Historically, the value of US farmland has been about 70% correlated with CPI. In no small part, this stems from the fact that increases in crop prices drive increases in inflation, as so much of an average household’s income is spent on food.
Farmland investors receive two sources of returns from their investments: passive income from periodic rental and crop payments and price appreciation when the property is sold. Higher crop prices translate to higher payments to investors, meaning that farmland investing is a natural hedge against inflation. An added benefit to investors is that higher crop prices increase the value of the underlying land, which leads to more robust valuations when the asset is sold.
In recent weeks commodity prices have soared, including prices for corn, soybeans and wheat. These staples are hitting their highest price in more than six years, buoyed by strong export demand from China and dry weather. This is signaling to many investors that it’s time to start preparing their investments for an inflationary environment. It’s also a booming time for US farmers and farmland investors.
2. Farmland provides attractive returns paired with low volatility
Not only is farmland a good investment in an inflationary environment — farmland also provides robust average annual returns. Between 1992 and 2020, farmland provided average annual returns of nearly 11%, including income and price appreciation. In comparison, the stock market returned only 7.8% on average over the same time period, while gold (another alternative investment commonly used to hedge against inflation) returned ~6.0%.
Farmland looks even better on a risk-adjusted basis. During this time period, the volatility of the stock market was 16.7%, while gold was not far behind at 14.8%. The volatility of farmland was 6.8%, which makes it most comparable to high-quality US bonds (volatility of 4.5%). The Sharpe Ratio is a commonly used measure of risk-adjusted returns, with lower Sharpe Ratios corresponding to low risk-adjusted returns (and vice versa). The Sharpe Ratio of farmland was 1.19, compared to 0.64 for bonds, 0.31 for US stocks and 0.22 for gold.
High returns coupled with low volatility means that US farmland is an excellent store of value over time. If you had invested $100 in US farmland on December 31, 1991, it would be worth $1,981 on December 31, 2020 (using the NCREIF Farmland Index as a proxy) — an increase of 19.8x. In comparison, a $100 investment in the stock market would only be worth $901 over the same time period.
3. Farmland is a good source of passive income
A third reason to seriously consider investing in farmland is that it provides an excellent source of passive income. As discussed above, one component of farmland returns is comprised of rental and crop payments from the farmers operating the land. The income is considered passive because the investor doesn’t have to put time or effort into earning this income stream.
Passive income streams are positive for a number of reasons. Passive income enables an investor to increase their wealth without spending additional time working. Passive income streams also add diversification to your income and make your cash flow more resilient to shocks like an unexpected job loss. Investments that generate passive income are also attractive for those on a fixed income such as retirees because they decrease the amount of money that needs to be drawn from investment accounts.
4. Farmland is uncorrelated with other asset classes
Not only does investing in farmland allow investors to diversify their income streams — it also adds positive diversification to their overall portfolio. As can be seen in the chart below, farmland is uncorrelated with major asset classes like stocks, bonds, real estate and gold. This means that shocks that impact the performance of commonly held, publicly-traded assets don’t have the same impact on farmland investments.
It is a fundamental tenet of modern portfolio theory that diversification — investing in multiple uncorrelated asset classes — is critical for withstanding shocks and building long-term wealth. While many investors traditionally relied on a “60/40” portfolio (with 60% of investments in stocks and the remaining 40% in high-quality bonds) to reduce volatility while achieving healthy returns, many analysts believe it’s time to rethink that formula. Bond yields are at historic lows, and many fear that the stock market is overheating. Adding alternative investments like farmland into the mix can significantly reduce volatility while preserving returns.
5. Technology-enabled platforms make farmland investing easy
Finally, the fifth reason to consider adding an allocation of farmland to your portfolio is that technology-enabled investment platforms are making it easier than ever. For a long time, farmland investing was restricted to a small universe of institutional investors and ultra-high net worth individuals due to high barriers to entry including opaque markets and large minimum investments. However, platforms such as FarmTogether are changing that.
FarmTogether’s platform provides investors with an end-to-end platform for viewing and selecting investments, reading diligence materials, signing legal documents and monitoring their investments on an ongoing basis. Investors on the platform can feel confident that they have access to high-quality, carefully curated investments thanks to FarmTogether’s team of experienced investment professionals. Finally, high investment thresholds are a thing of the past, and investors can get started for as little as $15,000.
Disclaimer: FarmTogether is not a registered broker-dealer, investment adviser or investment manager. FarmTogether does not provide tax, legal or investment advice. This material has been prepared for informational and educational purposes only. You should consult your own tax, legal and investment advisors before engaging in any transaction.