Farmland is a proven asset class during all market environments.

Inflation is the word of the day and for the time being, it seems here to stay. In June, inflation hit a record rate of 9.1%, prompting central banks to become even more aggressive with interest rate hikes.

What is Inflation and Why is it a Problem?

Moderate inflation is an indicator of economic growth. But when growth accelerates too quickly, demand outpaces supply, and producers of all types raise prices. In retrospect, it’s clear to see why we’re dealing with inflation today. The pandemic boosted demand for consumers to buy goods. The post-pandemic recovery influenced people to purchase services and experiences. And governments around the globe financed economic recoveries with stimulus that enabled consumers to spend in a manner that outpaced supply. Throw in supply chain backlogs and rising fuel costs (which impact the cost of everything), and it’s no wonder that economies around the globe are dealing with historic levels of inflation.

Inflation has significantly increased compared to past performance

Inflation and Bear Markets

Inflation decreases money’s buying power and limits the volume of products or services that can be bought for the same amount of money. If wages don’t rise with inflation, people “feel” poorer and consume less. This results in lower sales and lower profits for companies. A common tool that banks use to lower inflation is to raise interest rates – but doing so increases borrowing costs for companies, which in turn leads to lower corporate profits. 

It’s a vicious cycle. Lower corporate earnings lead to lower share prices, and the combination of poor earnings and diminished investor confidence often leads to bear markets. During adverse market conditions, institutional investors move money into cash, gold, or other safe havens. Thus far, 2022 has been a negative year, and sustained market losses have prompted investors to seek hard asset alternatives that can protect their portfolios, especially as intangible assets now account for upwards of 90 percent of all of the assets in the S&P 500. One alternative investment that’s become a popular hard asset class is farmland.

Assets, stocks and investors

Why is Farmland Immune to Bear Markets?  

During a recession, people spend less, they travel less, but they still need to buy food, and that fact will never change. Investors who add agriculture to their portfolio gain access to an inevitable demographic trend, which is the continued growth of the world’s population. Forbes Magazine reported that by 2050, global food production will need to increase by more than 70% in order to keep up with a population that is estimated to grow to 9.7 billion people.  

Farmland investments create a variety of profit streams that facilitate wealth. This is especially true during times of high inflation. Farmland values have a highly-correlated relationship with inflation because when food prices rise, landowners receive higher crop prices and their land becomes more valuable as a result.

Stocks for most other asset classes have gone down

Why is Farmland a Good Investment During a Bull Market?  

Farmland is an exceptionally strong diversification tool. Farms keep pace with (and in some cases outpace) other asset classes during bull markets because it provides a stable complement to any portfolio. Farmland ownership produces predictable revenue (from the sale of crops), and it also provides long-term land appreciation. This helps to balance equity portfolios, when most other asset classes rise or fall each quarter due to macro-economic factors that are well beyond any investor’s control.  

Over the last 20 years, farmland investments have returned an average annual rate of return of 11 percent. This has not only kept pace with other asset classes over the same period, but it has done so with significantly less volatility. Farmland investments have historically outperformed asset classes including gold, bonds, and even commercial real estate.

investment opportunity in land

Land Value Appreciation

Land values are one of the major profit drivers for farmland investing. According to the NCREIF farmland index, farmland prices have increased by more than 6 percent per year, every year, for the last five decades, and land values have only decreased in five individual years over this timeframe. The limited nature of farmland increases the likelihood of continued long-term value appreciation. 

During the last 20 years, the value of farmland in the U.S. has increased by more than 300%. Today, the percentage of acreage dedicated to farmland in the U.S. is shrinking, which has further increased farmland values. Many investors are now considering agricultural investments in emerging markets such as Colombia, which offer lower-priced land and cost-effective labor.

Two prominent investors – Warren Buffett and Bill Gates have publicly voiced their opinions about farmland investment. Bill Gates owns more than 240,000 acres of farmland, and Warren Buffett summed up the benefits of this asset class as follows: “If you buy 100 acres of real estate now, in 100 years, your family will have the same land, plus all of the income it has produced over the century.”

Ultimately, the best benefits that come from investing in low volatility farmland (during a bear or a bull market) are predictability and the balance and diversification it can bring to your portfolio.    

Driven institutions are seeing this investment opportunity

What are the Different Ways that People can Invest in Farmland?  

Farmland investors don’t have to be familiar with crops or know how to grow food to achieve impressive returns. There are multiple ways to invest in farmland:

  1. Agriculture investors can buy shares of publicly traded companies like Archer Daniels Midland, Nutrien, or others.  
  2. They can buy mutual funds or Exchange Traded Funds (ETFs) that track the stocks of multiple agricultural companies.
  3. Investors can buy private and publicly traded farmland REITs (Real Estate Investment Trusts) that pay dividends.   
  4. Private equity funds that focus on food production are available to invest in, however some of these require minimum investments above a million dollars.
  5. And investors can follow Bill Gates’ lead by buying farmland directly, however that’s typically reserved for those interested in farming themselves (or hiring farmers) and actively managing all the farm’s day-to-day details.  
Is Farmland A Good Investment in 2022?

What’s the Best Way to Own Farmland?  

All of these options give investors access to the benefits of owning farmland, either directly or indirectly. Unfortunately, many of them are tied to the ups-and-downs of the stock market, and the fifth option requires expertise and a lot of hard work. 

Fortunately, there’s another option that gives investors the benefits of owning farmland without being subject to the whims of the stock market. It’s called Farmfolio, which is an innovative company that offers a turnkey model to address the entire seed-to-shelf process. 

The Farmfolio business model takes the hard work out of farming. Farmfolio purchases land in some of the most productive agricultural areas in Colombia, and sub-divides it into parcels called LOTs (Land Ownership Titles) which are sold to individual investors. Each LOT is managed by an independent Farm Owners Association (FOA), which acts like a homeowner’s association. 

The FOA hires and supports local farmers that take care of every detail – from land development, to planting and harvesting. Each Farmfolio investor becomes a landowner and a member of their farm’s FOA. The FOA has established sale and distribution agreements with local packhouses, who buy crops at price points that deliver consistent passive income to farmland LOT owners. In turn, all of these packhouses have long-term sale agreements with some of the world’s largest retailers.

Farmfolio’s turnkey process addresses every detail from seed-to-shelf and offers two income streams for investors: ongoing income from the sale of crops (aka harvest returns) plus significant long-term capital appreciation from owning land on a productive farm.  

Agriculture 2022

Navigating Between Bull and Bear Markets

Savvy investors find ways to navigate between bull and bear markets, particularly when everything else seems uncertain. The combination of short- and long-term income makes farmland investing a valuable complement to any portfolio. 

Today’s historically high rate of inflation has been a boon to farmers and agricultural producers, as a number of crop commodities have reached record-high prices. This short-term scenario, combined with the long-term tailwinds that accompany global population and demand growth for food, have positioned crop and farmland investors for healthy and sustained returns no matter what market environment we are in. 

Learn More Today

To learn more about investing in farmland, please download Farmfolio’s Agricultural Investment Guide 2022. This informative guide provides additional details on farmland investments, including trends in specialty crops, ways to identify profitable plants per acre, and it also includes details on location profiles, farmland values, risk assessments, and other factors.

To download the guide click the link above or visit https://farmfolio.net/learn/.

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