Farmland is a hedge against the growing national debt and rising inflation.
Early this year, the U.S. national debt crossed the $30 trillion threshold for the first time.
Of course, the debt isn’t new—it’s been piling up over the past few decades. What is new is the impact of the past two years. America’s efforts to overcome the COVID-19 pandemic hinged on debt-fueled government spending. But that spending also served to accelerate the debt’s growth.
The Impact Of Debt-Fueled Spending
These measures worked to lessen the crisis for most Americans. But the drop in tax revenues, coupled with deficit spending, has had severe implications for the national debt. The pandemic relief actions caused the U.S. to hit this milestone three years earlier than initially expected.
Unfortunately, the fact that much of this spending created positive short-term impacts doesn’t make the economic situation in America any less critical.
$30 Trillion Is a Lot of Debt
Some policymakers believe America’s growing economy and low interest rates make the national debt a non-issue. They insist that there’s little to worry about as long as the country can borrow cheaply to reinvest in the economy.
This rosy assessment of America’s federal debt assumes that interest rates will remain relatively stable over the long term. But the fact is, $30 trillion and counting is a lot of debt, and it brings an added level of risk to the long-term future of the U.S. economy.
While both major political parties are quick to blame each other, neither seems to be too interested in reining in spending and limiting the rate at which the debt has increased. The deficit will continue to grow as long as it’s the comfortable option, or until the country is forced to face some consequences and more investors in other asset classes take note.
In the meantime, it’s worth thinking about how to hedge against those risks.
The Risks and Consequences of $30 Trillion in Debt
Only two years after the debt to GDP ratio of the U.S. hit a record high of 136 percent in 2020, the U.S. national debt reached another milestone of $30 trillion. This amount of growing debt, along with other risk factors like rising interest rates, massive healthcare costs, and accelerating inflation, could undermine the world’s confidence in the U.S. dollar as a safe-haven and lead to the decline of the U.S. dollar as the world’s reserve currency.
While the economy is growing, ever-increasing government receipts can keep the debt service payments manageable. But as we experienced in the dot-com crash of the early 2000s and the global recession of 2008, the economy can be unpredictable. Previously unforeseen risks that might have otherwise caused only minor hiccups to the system can now have drastic consequences, especially on the stock market.
Global investor confidence relies heavily on the U.S. federal government’s ability to pay the debt back. A faltering economy or interest rates rising beyond expected levels could cause that ability to shift, shaking investor confidence and destabilizing the U.S. economy.
The Impact Of Rising Interest Rates
Interest rates are currently hovering near all-time lows, but low interest rates aren’t guaranteed to continue forever. In March, the Federal Reserve approved a 0.25 percentage point hike in interest rates, the first increase since December 2018.
Most investors are expecting rates to continue to rise throughout the year. Further, mid-term rate increases beyond current projections could drive up the cost of debt payments even more.
Other Risks From High Debt
Beyond the economic risks, so much debt leads to expanded monetary supply and inflation. In other words, the dollar will be worth far less than it previously was. The same phenomenon is occurring across the globe with central banks worldwide increasingly considering the use of higher interest rates as a lever to control inflation.
One of inflation’s lesser-known challenges is that the returns of bonds, stocks, mutual funds and most other asset classes don’t always keep pace. Even if your portfolio gains value along with the market, your purchasing power might not keep up.
Fortunately, with farmland investing, there are ways with solid returns and low volatility to hedge against these risks.
Why Farmland Is a Great Investment in Volatile Times
Traditional investments and other assets often don’t fare so well when the economy is in trouble. Equities and bonds can both take a beating, and this includes any exchange traded fund with exposure to stocks. Cash can lose value due to inflation, especially if governments flood the money supply with stimulus payments and easy credit. Expect not less volatility but more as the future results of stocks and other high risk investment options become more questionable.
Fortunately, there are other investment options, such as lower-risk investments available in other asset classes like farmland that can still provide high returns.
Why Farmland Outperforms
Farmland as an asset class is one of those investment opportunities available to farmland investors. While farmland returns are not risk-free (nothing is), based on past performance, it’s typically considered higher-return, lower-risk asset class.
Because it also possesses a physical component through crop production, farmland enjoys bond-like stability and higher yields. This is nearly the opposite of the yield curve for other asset classes like typical bond or stock market equities investments and underscore the perception of farmland as a good investment in your portfolio.
Farmland and the farming sector with agriculture also have a crucial advantage: multiple revenue sources. The land itself is a limited resource which means farmland values most often significantly increase over time. And at the same time as land values increase, farmland is also used to grow crops and other agricultural commodities, which bring additional revenue when sold on the market to meet the insatiable demand for food production. If future results are anything like historical returns for farmland, there really is no other asset class like it with such low volatility, and for investors, it certainly has appeal over riskier stocks.
Hedging Against Inflation
Farmland’s historical performance against inflation shows it’s not as prone to volatility as other, more traditional market assets like stocks and even your favorite mutual fund. Although inflation may ease in 2022, no one knows for sure what the future along with other adverse market conditions will bring. Investors would be wise to take action now to ensure returns keep up with expanding monetary supplies and worldwide inflation, and farmland is one such option.
Further, exposure to markets beyond U.S. borders is a great way to diversify your portfolio. In 2022, you don’t need to look too far to achieve that diversification. Current projections estimate that by 2028, 25 percent of global agricultural exports will come from Latin American farmland, where farmland values are also lower and more investors see farmland as an even more compelling investment opportunity. This is especially true for permanent crops like limes as opposed to farmland with row crops and annual crops like corn. Not all food production (and land) is created equal after all.
This part of the world is especially the perfect farmland climate for growing sought-after permanent crops that are seeing high global demand, which includes limes and also coconut crops. As the value of these crops soar (and usually the land value as well), farms are exporting them worldwide to meet insatiable demand.
Can You Own Farmland in 2022?
Historically despite high demand and low correlation to other assets, investing in a real asset like farmland was not an option for most people as access was challenging despite the strong historical returns. In addition to its short supply with less land available in America, few have the funds to purchase a farm or the knowledge to work and farm the land as a farmer and reap its full income potential.
Fortunately, modern times allow for other ways to access and invest in an asset class like agriculture and farmland. It’s possible to make a farmland investment and add the land to your portfolio and receive passive income but never set foot on the farm itself like a traditional farmer.
There are now onsite experts who plant, harvest, and sell your crops worldwide while overseeing your farmland investment and run the farm as your farmland partners. All while you hedge your portfolio (particularly stocks and mutual funds) with this exceptionally strong diversification tool against the current economic risks linked to inflation and massive government debts .
There are 30 trillion reasons for owning farmland in your portfolio. Fill out the form below to learn how to get started investing in farmland today.