When traditional investing is turned on its head, one asset consistently delivers.
When the calendar flipped to 2020, the Dow jumped 300 points, marking its largest one-day gain in nearly a month. The World Economic Outlook report noted market sentiment was generally positive, while the World Bank predicted a global rebound after the weakest performance since the 2008 financial crisis. Hopes were high for investors and consumers alike—and then the pandemic happened.
A similar storyline played out in 1970, when the start of a new decade and a strong economy were just the prologue of what would be the worst economic downturn since the Great Depression. Throughout the 1970s, the U.S. was rattled by sluggish economic growth, high unemployment and higher underemployment, rapid rates of inflation (peaking at 10 percent), increased taxes, and more debt.
As they say, history tends to repeat itself. Looking at the 1970s through an investment lens, there are additional similarities between then and now. And while it’s fair to say that things aren’t exactly the same, there is one particular asset that continues to perform well during times of high inflation and general uncertainty. (Spoiler alert: it’s farmland.)
Investment Lessons Learned From Historically High Inflation
By definition, inflation is the decrease in money’s buying power. Put another way, the volume of products or services that you can buy for the same amount of money declines. This not only affects things like food, gas, and consumer goods, but it also has a large impact on your investment portfolio.
There are several reasons why most assets fare poorly during times of high inflation. Equity investments tend to struggle because higher prices that are passed onto consumers may not make up for increased raw material costs, and any company profits are perceived to be worth less, so share prices decline. At the same time, if the Fed increases interest rates in an attempt to decrease inflation, borrowing costs for companies go up, leading to lower overall corporate profits.
In addition, if wages don’t rise with inflation, people will feel poorer and consume less, resulting in lower sales and profits. Similarly, inflation reduces the value of interest payments to debtholders. The longer the maturity of the bond, the more pronounced the inflation effect will be.
Ideally, your portfolio will increase in value at a faster rate than inflation, but this isn’t always the case.
Looking back at the economic crisis of the 1970s, traditional assets suffered severely. Ten-year bonds were earning 5.5 percent, about half the rate of inflation. The stock market didn’t fare well over the decade either. Starting at 809 points in 1970, the Dow ended at just 839 points in 1979—nearly no gain for long-term investors. But when taking inflation into account, stock prices went down down and market investors actually lost nearly half of their investment value.
But not all assets suffered. Many investors who put their money into other investment options like physical, tangible asset classes within agriculture managed to not only maintain their wealth but also grow it during one of the worst economic crises in history.
Specifically, farmland proved to be an excellent inflation hedge. According to the USDA, for U.S. farmland, the average price of an acre of farmland was $197 in 1970. By 1980, the price had skyrocketed to a whopping $737 per acre—nearly a 400 percent increase, or a 14 percent average annual return.
And that ROI doesn’t include the additional return farmland owners earned through the sale of their crops.
During the 1970s, food prices soared too. By 1973, the average inflation rate for groceries reached 20 percent. Beef prices doubled. Corn tripled. Wheat quadrupled. Prices rose quickly and remained nearly 200 percent higher in 1979 compared to 1972.
But when you compare the farmland values, even when adjusted for inflation, average U.S. farm real estate values increased 93 percent from 1970 to 1980. This made farm land values one of the strongest creators of wealth during an otherwise difficult decade, a time when farmland saw rising demand as it developed a reputation as a common inflation hedge investment.
Not all property performed in the same way, as residential real estate saw less impressive results. The median home price across the United States grew from $24,000 in 1970 to $59,000 in 1980, an increase of 145 percent. However, after adjusting for inflation, the median home price only increased 7.3 percent over that same period. Even areas of the country that outperformed the national average, like California, only saw their median home prices before inflation climb by 267 percent, or 61 percent when accounting for inflation. Commercial real estate had challenges as well. Perhaps it shouldn’t be surprising that during inflationary periods, many investors and financial advisors would say not all real estate is created equal.
When comparing traditional assets like stocks and bonds with physical assets like real estate, farmland investing and its ability to generate cash flow while building wealth from a real asset continues to stand out as the key asset to own when everything else is uncertain. It’s also a very good hedge against inflation.
How Does Farmland Beat Inflation Pressures?
In 2021, inflation soared to 7 percent—five times the rate in 2020. For investors, getting a 3.1 percent average return on bonds or a 7.4 percent average return on international stocks might feel satisfactory during periods of low inflation, but these figures are unacceptable in our current reality when everyone is facing reduced purchasing power.
During inflation and a rising consumer price index, individuals need to not only manage risk but also ensure the reward is higher than the rate of inflation. As demonstrated above, one asset class that has consistently demonstrated both low risk and high reward is farmland.
A natural hedge against inflation, farmland protects the value of your money during inflationary environments because it grows in value and offers multiple revenue streams. Think about it: food prices rise during periods of inflation, allowing farmer land owners to reap higher commodity prices. This also makes the land inherently more valuable, especially since it’s a finite resource.
What’s more, farmland is not just a hedge against inflation, but it’s one of the only asset classes not correlated to traditional market assets. The stock market, bonds, gold, and other equities are prone to volatility and often have a positive correlation, which makes their ROIs unpredictable. The same can’t be said about farmland investments, which have produced double-digit returns throughout the last 40 years, even in times of high inflation.
And since farmland is not a cash asset, farmland prices and and values can grow in value when inflation is high and the dollar’s buying power has declined. Ultimately it’s a good inflation hedge, and continues to attract not just institutional investors, private equity, and wealthy families looking to diversify their portfolios with consistent cash flow and land value increases.
How to Own in Farmland in 2022
Farmland is often on a list of agriculture investments that is left off the table because it has historically been hard to access compared with other asset classes. Not only is farmland in short supply, but farmers working in agriculture and turning a profit require knowledge, skill, and a tremendous amount of due diligence when evaluating farmland opportunities. There are other ways to do it, but none of them are as beneficial as owning the land directly.
But while you can choose to be an owner and operator, you can also invest in farmland and take advantage of this asset to generate passive income without ever stepping foot on your farm. You still own the land, but a third-party onsite expert team are the farmers and do all the farming and manage everything, including planting, harvesting, and selling your crops to major retailers, with the cash income sent to you.
It’s farmland ownership made easy, and it’s revolutionizing the way people can make farmland investments in crops with rising demand and add this incredible agriculture asset class to their portfolio.
To learn more about how to invest in farmland and generate income, check out our available opportunities. Then fill out the form below to see how farmland ownership can benefit your portfolio and be a hedge against inflation, especially when the economy’s future is uncertain.