We’re witnessing one of the most significant wealth transfers in history, with the 65-and-older population in the US growing by more than a third (34.2%) in the past decade. For retirement investment, this means a massive, structural shift.
Americans hold over $28.7 trillion in retirement accounts, mostly in IRAs, 401(k)s, and pension plans. Despite the increasing risk and ever-lower yield, many of those funds are in stocks and bonds.
However, there’s an alternative, uncorrelated asset worth adding to your retirement portfolio: farmland.
ISource: Vintage 2019 Population Estimates
Why Retirement Investment Is About to Change
Retirement fund asset managers are loading up on stocks and other higher-risk assets (up to 74% in the case of state pension funds, according to the American Enterprise Institute). Overheated equities are not something you want in your portfolio in your later years. Raoul Pal, CEO of Real Vision, believes we are entering a “retirement investment crisis” where everything from pensions to social security is in jeopardy.
Source: Goldman Sachs Global Investment Research
What’s this mean for retirees?
Many people 65 and older are coming out of retirement after discovering they don’t have enough savings to live the life promised to them for decades. The worse news is, it’s likely to get worse as all those millions of people enter retirement age in the coming decade.
For those who have enough savings to reinvest, there are few shortcuts to understanding the risks involved with their current retirement funds.
According to the US Bureau of Labor Statistics, almost 40 million private-sector employees weren’t offered a retirement plan through their employer as of 2018.
Retirement plans offered by employers have been declining for some time
It’s already common for many people of working age to believe that they may not be able to rely on social security or a 401(k) to last them through retirement.
It’s high time for the majority of us to take retirement savings into our own hands. This means searching for asset classes that can generate significant income over the long term, without losing the benefit of appreciation. For income-generating assets that appreciate over time and are sheltered from the volatility of publicly traded markets, look no farther than farmland.
Top Reasons Farmland is the Best Retirement Investment
We’ve spent a lot of time harping on the benefits of farmland as an asset class. But it’s worth reiterating, especially as the geopolitical landscape begins to show serious signs of unravelling. As markets brace for election-related chaos, holding real, non-correlated assets is more important than ever. Here are some reason why farmland may be the right choice as a retirement investment:
1. Farmland is a hedge against volatile market cycles and crises
Farmland is well-known as a durable hedge in times of crisis. It’s one of the few uncorrelated assets to other traditional investments and delivers a reasonable income.
Farmland is uncorrelated to the volatile swings of economic cycles. Because of the pandemic, the next 12-24 months are likely to be volatile for the market. Investments like commercial, office, and retail real estate will fall out of favor compared to tangible assets like farmland.
When you look at the 10-year correlations of farmland across asset classes, farmland’s hedging power is clear as day:
During the tech bubble of the early 2000s and the 2008-2009 Financial Crisis, farmland returns remained relatively stable. The data is in: farmland has strong risk-weighted returns, making it an excellent portfolio hedge.
The average annual return of farmland has ranged around 10% for the last quarter-century. Farmland has historically outperformed stocks, bonds, REITs, and even real assets like gold, with double-digit returns for the past four decades and very low volatility.
Farmland is the new gold. It’s enjoyed a compounded return of over 16% from 2005 to 2015. Meanwhile, the S&P 500 fell short, with a total return of 10% (NCREIF).
Farmland returns declined between 2014 and 2018 as the market became overheated. With the way the economy is shaping up in 2020, we’re likely to see a repeat of that market cycle. Besides, farmland values tend to appreciate even when farmland returns are in flux.
Suppose that wasn’t enough reason to diversify with farmland. In that case, consider how this is an asset that increases in value as sovereign bond interest rates drop.
Unless you’re living under a rock, you’ll know that global sovereign bond yields are reaching near-zero for the foreseeable future, and that’s a massive benefit for farmland investors.
In other words, the time to invest in farmland was not 2015. It’s now.
Reason 2 – Farmland has attractive supply-demand dynamics
Financial yields from farmland tie to food prices, which didn’t experience a critical hit in previous pandemics (such as the SARS and avian flu outbreaks, when food prices went up).
A collapse in commodity prices may affect a farm’s income. Still, the data shows that farmland’s real estate value remains stable and appreciates even during a prolonged drop in commodity prices.
Farmland is a historically resilient asset class
Agricultural products have a strong supply-demand dynamic, while demand will logically grow in step with the global population. The total population should reach 10 billion over the next 30 years, a roughly 30% increase.
The United Nations estimate that global food production has to increase over 60% to meet the explosive demand.
Therefore, farmland will be in high demand for the foreseeable future.
Reason 3 – Farmland is versatile and appreciates without effort.
Land as an asset is one of the most lucrative investments in real estate you can make. They’re not making any more of it, and the amount of arable land available is decreasing for many reasons. Hence, land value tends to appreciate over time.
The number of people operating farms is also collapsing as farmers enter retirement. The Center for Rural Affairs predicts that “half of all current farmers are likely to retire in the next decade.”
According to the American Farmland Trust, about 370 million acres of farmland will change ownership over the next two decades. As all that land enters the open market, pension funds, and other companies and institutions looking to financialize the properties will gobble up the bulk of those assets.
It’s a trend that will draw the startup economy closer to the ag sector, sparking an innovation boom in farm management and agricultural production. The same explosive returns we see today in big tech stocks may soon include innovation-driven ag companies.
It would be unwise to ignore such an enormous market imbalance when structuring a retirement fund.
Source: World Bank; UNFAO.
Farmland is an incredibly lucrative option for a land investor, as you can diversify row crops and livestock with permanent crops, like timber and orchards.
Reason 4 – Follow the money
What you’ve read here are all the reasons why over the next five to 10 years, almost $40 trillion will flow into real asset investments like farmland.
As funds search for alpha in increasingly risky assets, investors worldwide are more interested in farmland as a real, uncorrelated asset with reliable positive returns. Farmland is becoming popular as a retirement investment, similar to real estate for the past 30 years.
Pension funds are looking closely at farmland – but private ownership is a better option
The growing interest in ‘ESG’ (environmental, social, and governance) investing among institutional investors is a boon for farmland as an alternative investment. Farmland operations have great potential to adapt positive ESG practices, translating into greater investor interest, more tax incentives, and positive publicity.
Plus, as the urban landscape evolves and both land and water become more scarce, indoor vertical farms may become as commonplace as conventional farms. While big players like Google and Softbank have piled money into the sector, it is nowhere near as mature as traditional agriculture.
Reason 5 – Tax benefits
Investing in farmland protects you from capital gains taxes and income taxes. Push your profits straight into your retirement account so that it can grow without a tax burden.
Farmland invested through an IRA, for example, is capital gains tax-free. Taxes on income get indefinitely deferred, so you only have to pay tax when you withdraw assets as income.
Disclaimer: We are not tax professionals. No part of this document is intended to provide financial advice of any kind, nor tax advice. Always consult with a third-party financial advisor. Farmfolio and its affiliates assume no legal responsibility for any financial decision made on the basis of this document.
There’s Still Plenty of Room in Farmland Investing
Even though farmland investing benefits are many, only a small number of investors are in this asset class.
Total farmland value in the US alone is roughly $2.5 trillion. With the state of retirement funds looking grim, on top of an economy slipping into recession, where do you think investors will look for security and yield?
Equipped with this knowledge, you can bet there’s strong potential for farmland investments to appreciate well into your Golden Years.
Farmland, as an asset class, is still in its infancy. However, as more farmers retire and the sector innovates, the floodgates will open for institutional investment. You want to be on the right side of the farmland boom.