Farmland: A Reliable Asset in an Uncertain Economy

2022 has been a difficult year for nearly every investor to stomach – even seasoned veterans who thought they’ve seen it all. Amid the unprecedented combination of economic, political, and supply chain developments, a wave of uncertainty continues to disrupt financial markets as we know them.

It can be a confusing time for investors trying to make sense of what this could mean for their portfolio. For those looking to safeguard their investments from the roller coaster markets, one new opportunity – farmland – may be worth exploring.

The Current Landscape

The Federal Reserve and its stance against inflation set the tone for most of 2022.

The Consumer Price Index topped out at 9.1% in June, the highest annual price growth rate in over 40 years. In October, the CPI measured 6.6% higher than 12 months prior, the most significant increase over one year since 1982.

In response, the effective Federal Funds rates soared from 0.08% in February to 3.08% in October. Chief economists continue to call for rate hikes until inflation has at least halved. In response to rising interest rates, mortgage rates are now the highest since April 2002, causing pending home sales to be at their lowest since 2010.

2022 was also plagued by systemic supply chain disruptions, due to the lasting impacts of the COVID-19 pandemic and the war in Ukraine. At the start of the year, it took an average of 113 days for trans-Pacific cargo in Asia to reach the U.S. or Europe. As of September, the commute was still higher than average, at 86 days. In addition, 91% of global supply chain leaders report that disruptions occurred beyond their direct supply base. In the same survey, companies reported an average loss of $182 million related to supply chain issues.

These supply-chain disruptions, among other factors, caused the S&P a loss of 23.9% in the first three quarters of 2022. To put things into perspective, only five full-year calendars have recorded a lower annual return. From January to August, 87% of trading days experienced intraday swings greater than 1%. The last time the market had been this volatile was in the midst of the 2008 Global Financial Crisis.

There are potential bright spots in the economy to consider. After two consecutive quarters of negative GDP growth to start the year, U.S. GDP increased by 2.6% in Q3 2022. Labor markets have continued to perform strongly; non-farm payroll employment has increased every month between January 2021 and September 2022. As investors approach with cautious optimism, the S&P 500 rose 8.13% in October 2022.

Hedging Against Market Uncertainty with Farmland

With current market conditions sending signals not seen since the last major global recession, many investors are beginning to look for assets with recession-resistant attributes to help hedge against risk and maintain their wealth.

In many cases, these same attributes appealing to investors through turmoil into a recession are also characteristics of farmland.

Below, we dive into the top characteristics of farmland and how each may help protect your portfolio in this uncertain time.

Capital Preservation

Historically, farmland has retained its value comparably well. This is largely due to the fact that the demand for many agricultural products, food in particular, is inelastic, meaning it tends to remain consistent throughout the year and economic environment.

Adding farmland to a traditional portfolio has historically reduced the portfolio’s standard deviation (the dispersion of returns you can expect to receive). In fact, adding a 15% portfolio allocation to farmland from 1992 to 2021 would have reduced your standard deviation by 1.61% while still generating higher portfolio returns.

Capital Growth

Imagine it’s 1992, and you have $1,000 to invest. Today, depending on what you chose, you’d likely have:

• ~$5,000 had you invested in gold
• ~$13,000 had you invested in the S&P 500.
• Over $20,000 had you invested in farmland.

As the global population continues to rise, this demand will only increase. In fact, the Organization for Economic Co-operation and Development (OECD) forecasts that the amount of agriculture needed for food, feed, fuel, and industrial inputs will increase by 1.2% every year over the next decade.

In addition, it’s estimated that the United States loses 2,000 acres of quality farmland every day to urban or residential conversions. In 2021 alone, the United States lost 1.3 million acres of arable land. As farmland’s supply and demand move in opposing directions, long-term structural trends have supported farmland prices. As a result, what land is currently in use is steadily increasing in value. In 2022, farm real estate values across the U.S. were 12.4% higher than the year before.

Low Correlation

Financial yields from farmland are, in part, tied to commodity prices and output. Therefore, farmland investments have historically moved independently of other types of investments. Farmland’s -0.06 correlation to the stock market and -0.03 correlation to REITS indicates it has historically had little to no relationship with equity trends or real estate.

As a real asset, farmland’s diversification benefits are even stronger. Real assets have been shown to improve the risk-adjusted returns on a traditional portfolio of stocks and bonds. Moreover, real assets generated stronger returns since 2002 during times when inflation was rising. During periods of inflation between July 2002 and June 2022, commodities’ annualized total return was 15.7%, while U.S. equities were only 7.7% and U.S. bonds were only 2.45.

Potential of Income-Generating Cash Flow

Though farmland itself is a more traditional long-term, illiquid investment, the asset may yield income-generating cash flow, particularly with row crops such as corn or soybeans.

The most recent U.S. crop cash receipt data shows almost $238 billion of cash receipts were received in 2021. In addition, total crop cash receipts may grow, as California’s prior year of cash receipts increased by 3.6% from the year prior. Moreover, farmland may be leased or rented to an operator, depending on the management agreement. In 2022, the nationwide cash rent for irrigated cropland was $227/acre, with rent for non-irrigated cropland at $135/acre.

Inflation Hedge

Since 1990, farmland’s rolling average decade return has historically been 4% greater than the CPI. This number is even more impressive on an annual basis; total average annual farmland returns have consistently been more than twice as high as the prevailing inflation rate.

Farmland returns are inherently tied to food prices, which tend to move in lockstep with inflation. The 12-month unadjusted CPI for September 2022 reported inflation for all items as 8.2%, while general food prices, in particular, rose 11.2%. As the price of food increases, investors may be able to reap the rewards of higher crop prices, which can factor into higher annual income.

Coupled with stable supply-demand dynamics, farmland investments can be expected to remain a good store of value during periods of inflation.

A Glimpse Into 2023

So much uncertainty surrounds investments in 2023.

Goldman Sachs strategists forecast S&P 500 levels anywhere from 3,150 to 4,000 (-10% to +13%) during 2023. Meanwhile, a Deloitte survey on commercial real estate expectations was split between professionals foreseeing revenues increase (40%) and revenues decrease (48%). Moreover, 36% of CEOs think we are currently in a recession, while 48% expect a recession during the first half of 2023.

On the contrary, many industry leaders remain bullish on farmland. Some experts predict farmland cash rental rates to rise by nearly 5% in 2023 while a majority of U.S. agricultural producers expect farmland values to rise over the next five years. 2023 commodities futures contracts also point to relatively high projected prices, a positive indicator for operating income.