Here’s four reasons you should consider adding this asset to your portfolio.
Smart investors know that there is an inherent risk associated with less stable financial assets such as stocks and proactively diversify their portfolios with more consistent, lower risk holdings. With the current economic outlook uncertain, farmland has become an increasingly popular choice for those seeking an investment that can withstand recessions.
Learn about the attributes that make farmland recession-proof as we explore the historical ability of this asset to maintain or even increase its value in challenging financial times.
Negative correlation with other assets
Simply put, farmland is a wise route for diversification because it moves in the opposite direction of other asset classes. During recessions, when the value of stocks, bonds, and other investments falls, farmland historically increases in value. In the USDA survey cited above, even as land values declined during the 2008 recession, farm operations (comprising land, equipment, business, livestock, improvements, and other associated assets) increased in value by more than 8 percent.
Unlike assets such as companies and gold, whose value is dictated by the open market, crops and land create food, which gives them an inherent value, particularly as the global population continues to expand. Compounding this effect, nations such as India and China have a rapidly growing middle-class as average wages rise in those areas, further increasing food demand because higher income results in better nutrition and more dietary choices. For example, research from Purdue University stated that there was a 29 percent annual increase in soybean exports from the U.S. to China every year from 2005 to 2010.
Historically high returns
The NCREIF Farmland Income Index, published annually by the National Council of Real Estate Investment Fiduciaries, reports that the value of American farmland has increased by more than 300 percent since 2000. The limited nature of farmland increases the likelihood of a long-term value increase. Back in 2012, Purdue University reported that the percentage of U.S. acreage devoted to farmland had already been decreasing for several decades. As the availability of domestic land dwindles over time, the cost to purchase or rent a farm will rise with demand.
Smart investors are also considering agricultural land in emerging markets, often at a more affordable cost with higher return potential compared to developed markets. These nations, including but not limited to Thailand, the Philippines, Mexico, Brazil, Chile, Peru, and Colombia, have become serious contenders in the global farmland sector, offering low-priced land and cost-effective labor.
No matter where you own farmland, a paraphrased famous quote from legendary investor Warren Buffett is apt: If you buy 100 acres of land now, in 100 years, your family will have the same land, plus all the income it produced over the century.
Increased food demand
As the global population continues to grow, the resulting demand for food will expand exponentially, and it will position crop and farmland investors for healthy long-term returns. Even in times of economic turmoil, the demand for food remains steady—unlike the demand for less essential consumer goods.
To illustrate this phenomenon, let’s look at limes. The citrus fruit, popular worldwide, experienced supply chain disruption and demand issues in the U.S. in the late 1990s and early 2000s because of extreme weather and agricultural disease. As a result, nearly all the limes we consume in America come from Mexico, and the U.S. has become the largest international importer of limes, with nearly a quarter of global lime exports going to the United Kingdom, Italy, France, the Netherlands, and Germany.
As political unrest and criminal activity in Mexico have impacted the global lime trade, new lime farms and markets in emerging economies have increasingly filled the void, creating significant financial opportunity for farmland investors. Since 2015, the fastest-growing importers of lemons and limes have included:
- Egypt (increase of more than 170 percent)
- China (increase of 333 percent)
- Colombia (increase of nearly 450 percent)
Many smart farmland investors can profit by focusing on these and other similar pockets of opportunity to benefit from rapidly changing global supply and demand. Forbes reports that by 2050, we will need to increase current food production by 70 percent or more to meet the projected global population of 9.7 billion.
Investing in farms doesn’t necessarily mean purchasing land and raising crops or animals. More investors than ever before are realizing the benefits of owning a farm without setting foot on agricultural land through passive land ownership. For example, investors can purchase shares in land and receive proportional returns accordingly. As many farm owners retire without succession plans, opportunities arise for passive investors who can provide the necessary financing to preserve these operations.
Passive farmland investment also offers countless opportunities for diversification as you can spread your investment across a range of interests or geographic areas, and it lets you avoid day-to-day challenges such as land, soil, and supply chain management, water access, and the pure labor of living on a farm, while still reaping the rich returns available from crops, land value, and other income streams.
When compared against developed markets, Latin American nations provide compelling passive investment opportunities, especially for those interested in the potential profit returns from citrus farms. Colombia, Peru, and Guatemala have been expanding rapidly in this sector because of ample available land, favorable climate, and easy access to the U.S. for distribution. Notably, Colombia can grow the best-selling Tahitian lime all year, bridging the gap created by extreme weather in Mexico that has raised the global price of limes from $1 to $3 per kilo.
While conventional wisdom suggests pausing your investment activities during a recession, strategic asset choices such as farmland can improve the chances of steady returns in economic downtimes and beyond. If you’re ready to learn more, connect with Farmfolio to explore passive income investment opportunities in successful, established Latin American farms.