Fighting Inflation with Farmland: 5 Things You Need to Know
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Inflation may be the single biggest challenge to investors in today’s economy. With inflation measures reaching highs not seen in 40 years, urgency is building for investors to adapt.
Farmland, with its fundamental strength as a real asset and historically consistent performance even during times of high inflation, may be able to serve investors as a viable defense against today’s economic conditions.
In a November 2022 webinar, “Fighting Inflation with Farmland,” AcreTrader CEO and founder Carter Malloy and Director of Farm Operations and farmland market expert Ben Maddox discussed why.
Here are five key takeaways (full recording available at the bottom of the post):
1. We may be experiencing an economic regime change.
For the past 40 years, steadily falling interest rates and low inflation have served as serious drivers for financial assets like stocks and bonds.
The pre-1980 economy was defined by rising interest rates and rising inflation that wasn’t tamed until the federal funds interest rate peaked at around 20%. Trends since 2020 suggest that we may be returning to a general environment more similar to the 1970s and before.(1)
2. Whereas financial assets underperform in inflationary conditions, real assets can serve as a hedge.
Research from BlackRock shows that, on an average annual total return basis, real assets like real estate and infrastructure have outperformed both stocks and bonds in periods of high inflation, whether economic growth was high or low.(2)
In contrast, inflation erodes returns on equities. Historically, when inflation exceeds 5%, S&P 500 Total Real Returns fall 2.5% year over year on average.(3)
3. When it comes to diversification, the traditional stock/bond portfolio may no longer be enough.
In order to offer diversification from each other, assets need to exhibit low correlation.
The conventional 60/40 split between stocks and bonds is based on the understanding that these assets correlate negatively with each other. But recent research has begun to challenge that idea: prior to about 2000, stocks and bonds showed a generally positive correlation.(4)
And unfortunately, stocks and bonds are both down dramatically year-to-date. As of September 30, 2022:
- Aggregate Bond Total Returns were down 13.4%.
- The S&P 500 Total Return was down 23.9%.(5)
4. Farmland may be an alternative worth considering.
Here are several reasons why:
While farmland historically does not show much of a correlation with stocks or bonds, it has shown a positive correlation with inflation since 1969.(6)
Not only that, but farmland also shows a positive spread to inflation. In other words, total farmland returns have consistently beaten the inflation rate.(7)
Thus, we see major investment managers talking more about this real asset. Research from Nuveen, the $1.3 trillion investment manager of TIAA, has shown that adding 2-5% of a portfolio to farmland and/or timberland can improve a portfolio's overall returns and at the same time reduce risk.
In 2022, farmland returns are outperforming other common inflation hedging assets like gold, TIPS, and T-bonds.(8) Even though rising interest rates are resulting in higher fixed income coupons, high inflation creates a negative real interest rate, which negatively impacts the value of those coupons as well as the underlying investments.
Farmland returns consist of both an annual yield as well as value appreciation of the underlying real asset: land. This appreciation component is much less vulnerable to the effects of inflation.
Gold in particular is seen as a superior inflation hedge, but gold is actually down 8.6% in 2022, and during certain years, gold losses have been as steep as 30%.(9)
Even amid today’s economic headwinds, farmland fundamentals are strong. Firstly, low debt-to-asset ratios mean reduced risk in the overall farmland market (especially when compared with other industries like commercial real estate). This sets the current moment apart from the 1980s, when farmland returns were negative for several years.
Secondly, farmland is a finite, even shrinking, resource with a direct relationship to commodities and consumer goods which themselves factor into inflation. In short, farmland supply/demand dynamics are favorable for the long term.
5. Early exit results here at AcreTrader indicate that farmland’s strengths are playing out in the current economy.
AcreTrader’s first four investment dispositions, all completed within the last 12 months, returned a weighted average IRR of 18.1%.
These returns are composed of both annual cash returns and improvement in value. As these investments were held for relatively short periods, the bulk of these returns are the result of value appreciation during inflationary times. Farmland’s annual coupon isn’t negligible, but most investors are now investing in farmland for its value preservation and appreciation potential.
Certainly, these results are not typical of most years, nor are they indicative of any future results. Every investment carries risk, and farmland is no different.
The shifting economic landscape we find ourselves in is spurring many investors to take action to protect their portfolios, foremost from inflationary conditions that may prove persistent. Farmland’s performance within larger historical trends single it out as a potential antidote to some of investors’ biggest challenges today.
Dig deeper into the data presented here by watching the full webinar below, or create your free account to start exploring how to incorporate farmland into your investment strategy.
(1)BLS, Federal Reserve Economic Data, AcreTrader analysis. (2)Blackrock, NCREIF, AcreTrader analysis.(3)AcreTrader analysis of Robert Shiller data. (4)AcreTrader analysis of Robert Shiller Data. 10-Year Rolling Inflation Adjusted Total Returns (S&P 500 TR vs US 10-Year Treasury). (5)Data through September 30, 2022 via NCREIF, S&P Global. (6)Federal Reserve Economic Data, USDA. (7)TIAA, Bureau of Labor and Statistics. (8)Data through September 30, 2022 via NCREIF, BLS, NASDAQ, S&P Global. (9)Data through September 30, 2022 via NCREIF, BLS, NASDAQ, Bloomberg, S&P Global.
The above content is not intended to be a comparison between products, but is intended for general, educational and informational purposes only. Any performance noted is historical and there is no guarantee any trends will continue. All investing involves risks, including the complete loss of principal. Diversification does not guarantee a profit or protect against loss in a declining market. It is important for each investor to review their investment objectives, risk tolerance, tax liability and liquidity needs before investing. Investment vehicles have differences in fee structure, risk factors and objectives. Investments are considered speculative, involve a high degree of risk and therefore are not suitable for all investors.
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A review of perspectives from various financial institutions on how to adapt the traditional 60/40 portfolio split for a changing economy.
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