If murder hornets were the worst news of 2020, we’d all be coming off a weekend of BBQs to celebrate the 4th of July. But of course, they aren’t, and we’re not.
Adding insult to injury, across the financial industry, many are now predicting that inflation, which has been near zero for nearly a decade, could return with a vengeance. Jay Powell may be excited about this news to some extent, but for the rest of us, this potentially means protecting our investments from inflation, while looking for potential returns.
In this post, we investigate ways we can hedge our investments against inflation and look at how US farmland performs during an inflationary period.
For many, this means looking to an asset like gold, or to TIPS (Treasury Inflation-Protected Securities) and other inflation-protected bonds. Recently, massive TIPS purchases have led to higher prices and lower yields as they offer the security of US government-backed bonds along with inflation protection.
That said, inflation-linked bonds aren't the only way to hedge against inflation. There are other secure investments highly correlated to inflation you may consider for your portfolio that could even offer higher yields. With current negative TIPS yields, investors’ show willingness to actually pay to hold US government debt in real terms.
There are other assets with inflation-protection that don’t require the same compromise on returns.
US farmland is just that. With farmland, you’ll get returns from land appreciation when you sell as well as annual cash income from the crops. Farmland’s value rises at least as fast as inflation for good reason. Because of what it creates - food.
Food is the third-largest category used to calculate the Consumer Price Index, or CPI, one of the two most common measures of inflation. It’s a necessity for all households and comprises about 10% of the average American’s budget. That means, inflation is in part calculated based on the price of key commodities. Then as food - or if you own farmland, crop - prices rise, then those changes are reflected back in inflation.
In fact, primary crops like corn and soybeans not only directly impact inflation, their use as livestock feed will also flow through to other items within the food category, like poultry or cattle. As Ed Clark of AgWeb puts it:
“When comparing farmland with a basketful of investments, as well as inflation, land has a 70% correlation with the Consumer Price Index (CPI) and a 79.84% correlation with the Producer Price Index (PPI), the two main measures of inflation, according to the TIAA-CREF Center for Farmland Research, University of Illinois. Nothing is a closer match to farmland than inflation.”
Moreover, not only can farmland produce annual cash crops, but farmland also creates reliable appreciation to augment investors’ returns over time. That, too, is connected to inflation where the limited supply of arable land combined with what it produces maintains its value.
Even with record-high inflation in the 70s, farmland kept pace. While the near 20% increase in inflation during this time was, and still is, unprecedented, and the result of factors including abandoning the gold standard, it isn’t out of the realm of possibility that inflation could reach double-digits again.
For an increasing number of investors, farmland is the way to stay ahead of rising inflation.
Due to its unique relationship with inflation, farmland investing provides an opportunity to maintain one’s wealth in scenarios like the rising inflation of the 1970s or the near zero rates of the past couple decades. With so many unknowns in 2020, predictions of rising inflation are just another layer of uncertainty. Across the country, prime farmland will continue to maintain its value, and producers will continue to receive cash income from essential crops. No matter if the world is in flux, the need for food and the farmland to produce it, remain.
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