Farmland: The New Safe Haven Investment

For many investors, the past 18 months have been characterized by extremes — outsized stock market performance combined with unprecedented market volatility. Many investors are seeking out safe haven investments, although in today’s low interest rate environment it’s challenging to find investments that both preserve capital and offer a healthy return. However, one newer safe haven investment that does both is US farmland.

Read on to learn more about how farmland can play a role in managing your portfolio’s volatility.

Investors flock to safe haven investments amid market uncertainty

Safe haven investments are investments that preserve their value during times of economic stress or market volatility. For most retail investors, the most familiar safe haven investment is high-quality sovereign bonds. In a traditional 60/40 portfolio, the gold standard for many individual investors, 40% of investments are held in bonds. Historically, this portfolio offered the best of both worlds: healthy returns combined with the downside protection and capital preservation offered by bonds.

However, in today’s low interest rate environment, yields on most US government bonds are below inflation, while yields on high-quality sovereign bonds from other OECD countries are in many cases negative. That means that instead of getting both safety and a return on capital, investors are forced to pay for the privilege of lending governments money. Nor is this expected to change anytime soon. Charles Schwab estimated that yields on all US investment-grade bonds would decline drastically over the coming decade to 1.9% per year, compared to 7.3% historically. In short, investors in search of a safe haven investment that offers a healthy return need to look elsewhere.

Other traditional safe haven investments such as cash and gold are not much more promising. Low interest rates mean that rates on savings accounts are rock-bottom and far below inflation. Gold may look more attractive to many investors, given its traditional role as a hedge against inflation. However, gold is extremely volatile and does not offer investors a source of income.

Alternative investments can act as safe haven investments

Many savvy investors are starting to think outside the box when it comes to portfolio construction. Aside from the traditional safe haven investments mentioned above, certain classes of alternative investments can offer many of the benefits of sovereign bonds or gold combined with more attractive returns.

Broadly speaking, alternative investments are attractive to add to a portfolio for several reasons. They are uncorrelated with public markets, meaning that adding alternative investments increases portfolio diversification. Alternatives also decrease portfolio volatility, given that many are less volatile than the stock market. Finally, the right alternative asset offers the benefit of passive income, making them an attractive substitute for low-yielding bonds.

One alternative investment that functions as a safe haven is real estate. While real estate may not be the first example that comes to mind, especially given the crash in housing prices during the Great Financial Crisis, real estate can add diversification to a portfolio. The real estate crash during 2008 - 2009 was, in fact, an outlier, and real estate has delivered positive returns in most quarters. Private real estate is less volatile than the stock market, and real estate income can provide investors an attractive return on capital, in contrast to bonds.

However, real estate is by no means the only alternative investment that can function as a safe haven investment. Thanks to technology-enabled investment platforms like FarmTogether, another safe haven asset is now available to individual investors: US farmland.

Farmland: the new safe haven investment

US farmland has many of the same attractions as real estate, with some additional benefits. The value of farmland is underpinned by its crucial role in the global economy: the need to feed a growing population. Like gold, farmland is also a scarce commodity, but unlike gold, the total amount of farmland is decreasing. Farmland is less volatile than either public equities or real estate, so adding farmland to a portfolio decreases its overall risk, and the performance of farmland is uncorrelated with that of other major asset classes.

Farmland offers all these benefits while also delivering investors healthy returns around 11.5% per year, according to the USDA. Finally, farmland offers investors two sources of income: price appreciation when the underlying asset is sold and ongoing passive income from rental and crop payments.

Most importantly, farmland is a safe haven asset because it performs well throughout economic downturns. The value of farmland is predominantly driven by demographic trends, so as long as the population continues to increase, so should the value of farmland. This is borne out by historical data — as can be seen in the chart below, the value of US farmland has steadily climbed since the 1990s.

Source: Nuveen

No one can time the market. The best thing to do is to diversify your portfolio and be prepared for a downturn before it happens. Interested in learning more about whether farmland is the right safe haven investment for your portfolio?