What's Distinguishing Farmland Over Other Real Assets… Including CRE & Gold?
In the swirling vortex of today's economic environment, even the bravest investors are grappling for solid ground. Amid sky-high interest rates, inflation, and unsettling market conditions, searching for stable, profitable investments has become a high-stakes endeavor.
While optimistic economic signs flicker, they do little to dispel the shroud of uncertainty cast by geopolitical tensions, at least two more interest rate hikes, and a looming economic slowdown. Now, the call to diversify portfolios and safeguard capital echoes louder than ever. Precious metals and many types of real assets offer some refuge… including one that has been historically off-limits: farmland.
History is our best teacher that farmland investing outshines U.S. stocks and bonds, and provides a compelling allocation alongside real estate and gold. Persistent double-digit returns for thirty years, decreasing supply, and low volatility only scratch the surface as to why this is. Let's dive into it.
The Current Financial Climate: Unraveling the Scene
The current financial climate presents a multifaceted puzzle for investors. Over the last 15 months, the Federal Reserve has aggressively increased rates by 500 basis points, hiking them 10 consecutive times. As a result, benchmark rates have soared to 5-5.25%, levels not experienced since before the financial crisis. Despite a recent pause in interest rate hikes and a drop in U.S. inflation to a 4% CPI, unease lingers in the market. Adding to this concern is a prediction from the Federal Reserve model, indicating a 70% probability of recession—the highest forecast since 1982.
How Much Longer Could Rates Keep Rising?
Despite the Fed's recent pause in raising rates, inflation remains an issue, with core inflation over 5% and the CPI still double the Fed's 2% target. A resilient economy and tight labor market, alongside geopolitical tensions, continue to stoke these inflationary flames.
The Federal Reserve's "dot plot" anticipates two more rate hikes this year, reaching 5%-5.25%. However, this can always change. Chairman Jerome Powell and 12 of 18 Fed policymakers reflect the dot plot and see at least two more rate hikes this year, while the Atlanta Fed President Raphael Bostic favors keeping rates steady through 2023 to assess the economic impact of these hikes. Elsewhere, the Bank for International Settlements (BIS) pushes for more hikes to counter global inflation, while a Financial Times survey, backed by 42 economists, also foresees the two more quarter-point rate hikes, with 67% predicting the federal funds rate to peak between 5.5%-6% this year.
Impact of Market Headwinds on Traditional Investments
Today's financial turbulence has traditional investments like stocks and bonds in the crosshairs. Let's see how these prevailing market headwinds have affected their performance over the last 18 months.
Market volatility, fanned by soaring inflation, interest rates, and geopolitical turbulence, has constrained equity returns. Even after the S&P 500 emerged from its longest bear market since 1948 (June 11, 2023), the index lingers 9% below its highs. The plunge for Nasdaq was even sharper, down 35% in 2022 while remaining roughly 15% from its highs. However, the worst could return. Morgan Stanley's Chief Investment Officer, Mike Wilson, who accurately foresaw 2022's bear market, cautions of an impending 14% stock downturn. He characterizes the intertwining effects of the Fed's rate hikes and the ensuing economic slowdown as a "fire and ice" scenario.
Much like stocks, bonds are also facing significant headwinds. In fact, bonds entered a bear market in 2022 and saw their worst year in 30 years. Lawrence Gillum, a fixed income strategist at LPL Financial, went further and called 2022 the "worst year in history" for fixed income "by far."
High inflation rates make bonds less appealing as their yields get squeezed by surging interest rates. As of late June 23, 2023, the yield on 10-year benchmark notes hovered around 3.7289%, while the yield on 30-year bonds sat around 3.8151%, a stunning increase since January 3, 2022.
Impact of Market Headwinds On Real Assets
Many investors are turning to real assets such as precious metals, including gold, commercial real estate, and farmland investing. Each asset has unique properties that hold up against market headwinds. However, a deeper dive into the details shows that not all real assets maintain their value equally.
Gold shines in economic unrest as a stable, tangible asset and inflation hedge unswayed by government interference or stock market correlations. Despite a slight dip from its peak of over $2055 an ounce in May to $1923 as of June 23, 2023, the precious metal boasts year-to-date gains of about 5% and a 7% rise since January 4, 2022. A recent report from VanEck, anticipating a record-high price of $2075 by year-end, underscores gold's resilience amidst the severe impacts of today's potent "tail risks."
Commercial Real Estate
Commercial real estate (CRE), usually seen as a steady investment, faces upheaval due to inflation, high-interest rates, and demographic shifts. The e-commerce boom aids industrial spaces while office spaces languish with changing work trends. Major REITs reflect this, with NYC's largest office landlord, SL Green, dropping over 65% since January 3, 2022. However, Prologis and UDR, major logistics and multifamily REITs, also recorded declines of over 25% and 29%, respectively, in that same time period. Furthermore, Bloomberg warned of global real estate debt as a potential "time bomb" in January, a sentiment the Fed mirrored in March, citing it as a risk comparable to the 2008-2009 financial crisis.
Farmland's inherent value and stability position it as a resilient investment amidst market volatility and inflation. This sector's robust growth shows no signs of stopping: in 2022, nationwide farmland values escalated by 12.4% to a record $3,800 per acre, with standout increases in Iowa (17%) and South Dakota (18.7%). This escalating trend, coupled with population growth and dwindling farmland acreage, highlights farmland's pivotal role in future food security, distinguishing it as a complementary real asset investment to gold and commercial real estate.
History Sides With Farmland Over Other Asset Classes
Comparing Farmland to Stocks and Bonds
With the 60/40 stock-bond portfolios marking their worst returns in a century in 2022, per the Wall Street Journal, farmland investing presents a reliable alternative; over three decades, farmland has demonstrated lower correlations and volatility than stocks and bonds. Correlation values stand at -0.06 and -0.24 for stocks and bonds, respectively, and farmland's volatility, reflected in a standard deviation of 6.75%, is notably lower than the S&P 500's 16%.
During the 2008 recession, farmland posted a 7.33% quarterly return while stocks and high-yield bonds dropped by 52% and 26.2%. Additionally, while stocks and bonds falter in the face of inflation, the value of farmland and its returns rise in sync with food prices. The NCREIF Farmland Index attests to this, doubling the inflation rate pre-1992 and tripling it post-2000.
Comparing Farmland to Real Estate
In the past two decades, farmland has consistently outperformed commercial real estate. While the latter boasted annual returns of around 9.5%, farmland surged ahead with an impressive 11.98% average annual return since 2000, revealing its robustness during downturns and strength as an inflation hedge.
Both asset classes exhibit similar volatility profiles, but farmland has historically offered a higher frequency of positive returns and steady income from leased lands or crop yields, enticing those seeking passive income. Despite shared investment principles like location dependency and income generation, farmland often remains overlooked, indicated by the NCREIF Farmland Index's $12 billion value compared to NCREIF's National Property Index of $768 billion.
Comparing standard deviations from 1991 to 2021 further highlights farmland's advantage, with its lower standard deviation of 6.75% against real estate's 7.73%, underlining the former's relative stability.
Comparing Farmland to Gold
Farmland and gold offer portfolio stability, each yielding nearly the same return of around 10.6% between 1971-2019. However, farmland's journey was less volatile, boasting a 9% standard deviation versus gold's 13.1%.
Farmland has shown consistent positive returns since 1991, enhancing its appeal. Farmland scarcity is another advantage, with the U.S. losing 11 million acres since 2000 and global supply projected to decrease by 250 million acres in the next 30 years. In contrast, gold reserves are flatlining.
Farmland's correlation to inflation surpasses most asset classes, including gold's 0.157 correlation to the U.S. CPI. In other words, despite gold's liquidity and non-cyclicality, farmland’s characteristics could have the propensity for higher yields with lower volatility during inflationary periods.
Farmland: A Sturdy Complement To Your Real Asset Allocation
In this turbulent economy, real assets like farmland can offer shelter from the storm. Historically, farmland has proven stable, outpacing traditional and alternative investments with less volatility. Thanks to platforms like FarmTogether, this sturdy asset class is more accessible than ever, making it a promising choice for portfolio stability. Farmland investing isn't just for the rich anymore - it's a reliable cornerstone for any savvy investor's portfolio.
Interested in adding farmland to your portfolio? FarmTogether provides investors with four different farmland investment products – Crowdfunded offerings (fractional farmland ownership at a 15k minimum), their Sustainable Farmland Fund (diversified portfolio via a single allocation at a 100k minimum), Bespoke* offerings (sole ownership at a 3M minimum), and Tenancy in Common* (real property co-ownership at $500k minimum)– all with different associated benefits depending on your unique goals.
*FarmTogether’s Bespoke and Tenancy in Common products are also eligible for 1031 Exchange, which allows investors to swap one investment property with farmland, thereby deferring realization of capital gains and federal tax liabilities.
Visit FarmTogether.com to learn more and to check out their live offerings.
Or, watch our recent interview with FarmTogether Founder, Artem Milinchunk, below:
This communication is not intended to be relied upon as advice to investors or potential investors and does not take into account the investment objectives, financial situation, or needs of any investor. Historical data is not indicative of future results and may not reflect fees which may reduce actual returns. Any historical information is illustrative in nature and may not represent future results, therefore any investor investing through the FarmTogether platform may experience different returns from examples and projections provided on the website. You should not make investment decisions based solely on the information.