Highlight / January 23, 2021

Farmland Or Gold? The Great Debate

“I would rather own all the farmland in the US than all the gold in the world.” – Warren Buffet

Everyone knows that in times of uncertainty, gold is one of the go-to asset classes for diversification. Given that it tends to hold its value against publicly traded debt and equity markets, investors flock to gold in a crisis. But there’s an asset class that displays a similar pattern, only with the added benefit of cash yields – farmland. 

This combination of appreciation and cash yields has led many to dub farmland ‘gold with a coupon’. In fact, many even go so far as to say that farmland is better than gold. Consider this – over the past 20 years, gold has seen depreciation as high as 32% in a single year, while farmland has posted positive combined annual returns every single year. 

A hard asset like gold can be a valuable store of wealth in times of uncertainty. But it’s non-producing. Farmland, on the other hand, can produce valuable commodities which have historically averaged between 11% and 13% annual returns. Not to mention that farmland is even less correlated to publicly traded markets than gold is!

UK Farmland vs. Gold, 50-Year (Source: Knight Frank Research)

Farmland for Diversification

The phrase ‘diversification’ gets thrown around a lot, but when it comes to farmland it’s safe to say that there are few asset classes, if any, that help diversify a portfolio so effectively. Over the decades, farmland has proven one of the most resilient, least volatile asset classes on the market. 

US Cropland vs. S&P 500 and Corporate Bonds (Source: NASS)

After all, what is the purpose of diversification? Put simply, to reduce risk. And although there are many ways to accomplish this, one stands out for the true and absolute necessity of its production – farmland. Farmland is unique among all economic sectors and investment types.

Farmland’s ideal diversification potential helps explain why so many of the world’s super-rich are heavily invested. Bill Gates, for example, recently achieved the status of America’s top owner of farmland, quietly buying up over 240,000 acres across the country. Other billionaires like Jeff Bezos and Elon Musk aren’t far behind. Considering farmland’s performance during economic crunches, it’s no surprise that the super-rich are buying it at scale.

Farmland as an Inflation Hedge

Anyone who’s been paying attention to the massive amounts of quantitative easing undertaken by central banks during the pandemic will know that inflation isn’t just likely – it’s inevitable. With the Fed and others pumping trillions of dollars into economies across the world, holding cash at this point in time doesn’t seem like such an attractive option.

The ICE Dollar Index, 2020 Performance

In December, the ICE Dollar Index, which tracks the USD against six of its major rivals, dropped below 90 points for the first time since 2018. The index, down 7% total on the year, serves as a kind of canary in the coal mine for inflation. 

Indeed, the financial world is rife with dire warnings about inflation in 2021. Ulf Lindahl, chief investment officer of currency manager A.G. Bisset, warns of a 36% drop in value against the euro over the next two years. “This is the beginning of a very large move,” he told Reuters. 

Farmland is an ideal hedge against inflation. It’s a hard asset that generates stable returns, and average appreciation rates globally have outstripped inflation by over 2%, notwithstanding cash yields. In fact, farmland tends to appreciate more when inflation is higher. 

Farmland During Low, Medium, and High Periods of Inflation (Source: Business Insider)

Gold is often cited as one of the best counter-cyclical assets on the market, and for good reason. But gold, like any other publicly traded asset, can become worryingly overbought. This is likely what we’re seeing in the current environment where gold prices have soared over the past year. It’s almost certain that gold will shed some of that excess value in the coming years.

Gold isn’t a bad choice to hedge against inflation. But if you’re  looking for a long-term store of wealth in an environment when conventional alternatives like are looking severely crowded and overbought, farmland is the right choice for you. Don’t let inflation siphon off your wealth!

Farmland as an Income Investment

 

In today’s environment, the search for yield has become an exhaustive journey indeed. The lowest coupon on a US Treasury bond in the year 1990 was 5.89%. Today’s 30-year yields of 1.39% represent a 76% decline, requiring a principal over four times larger to achieve the same income stream in today’s bonds.

Source: US Treasury

For many, these developments are deeply troubling. While a 30-year US treasury bond currently yields 1.39%, inflation is now running at an estimated 1.71%. Risk-free investments no longer preserve wealth, let alone guarantee income. When risk-free returns don’t keep pace with inflation, what can individuals do to preserve the integrity of their wealth?

Farmland is highly stable when compared to other asset classes. This “slow and steady” characteristic has led to outsized returns, especially during times of crisis. Between 2005 and 2012, US farmland saw over 10% annualized returns, with land valuations outperforming US treasuries, the Dow Jones, and S&P 500.

Average Annualized Return, US Farmland (Source: NCREIF Index)

So how does farmland generate income? Simple – through the direct sale of commodities or through rents paid by the farm operator. Farmland investors have the option of owning the land directly and hiring someone to manage it, or leasing it to a farmer and earning income off of rent. 

In an environment where risk-free investments no longer preserve wealth, investors are searching far and wide for yield: private equity, ETFs, corporate bonds, the list goes on. But none of them provide the unique combination of appreciation and income that makes farmland such a dynamic asset class. 

Farmland or Gold?

 

Make no mistake: gold isn’t a bad choice if you’re looking for diversification or inflation hedging. The track record doesn’t lie – gold is a reliable store of wealth and an effective counter-cyclical asset. But farmland offers all of the same benefits, with the added bonus of cash yields. For the savvy investor, holding real assets in farmland isn’t a question of ‘yes’ or ‘no’ – it’s a question of ‘how much’.