Four reasons to consider adding this asset to your portfolio.
Wise investors understand that even the best investments carry some inherent risk and that diversifying their portfolios is a smart way to manage that risk.
Investment time horizon and risk tolerance play key roles in building a diversified portfolio. Many go straight to the stock market and mutual funds when thinking about investing, imagining that owning shares of several companies equates to diversification. While stocks and bonds can make up part of a portfolio, investors must proactively work to acquire multiple asset classes for truly diversified, recession-resistant holdings.
With the current economic outlook uncertain, real estate, specifically farmland, has become an increasingly popular choice for those seeking an investment that can withstand recessions.
Why Investors Seek Alternatives to the Stock Market
During a strong economy, many consumers readily invest in the stock market without doing much economic research. They throw money at whichever asset classes or individual stocks are “hot” at the moment.
Then a recession hits, and they lose money during an economic downturn, forgetting that the global economy normally moves in cycles of boom and bust. Consumer and market sentiment drives the stock market, preventing it from being considered a recession-proof investment.
What Are Recession-Proof Investments?
Investments that produce outsized returns during economic uncertainty and decline are often referred to as recession-proof. These assets are chosen by investors as a safeguard against negative impacts in an economic decline because they have an inverse correlation with the rest of the market.
Diversification into recession-proof investments protects against a significant decline in portfolio value during a bear market or times of economic stress. All investors, including those working with advisory or brokerage services, should be mindful of economic cycles, even during a long-term bull market. Stock market gains that took a decade to materialize can be rapidly wiped away in a market downturn.
But some investments offer investors the ability to maintain – or even increase – value regardless of where we are in the economic cycle.
Stable Industries and Utility Stocks
Although the overall market is not recession-resistant, certain sectors are. People often regard defensive stocks like utility companies, consumer staples, and dividend stocks as recession-proof.
Companies in defensive industries, like utilities and health care, tend to outperform during a recession. The thinking here is that, recession or not, people need electricity, water, and health care. So utility companies and those in the healthcare industry should continue to do well despite the economic turmoil around them. However, these industries often lag when the economy recovers.
Other Recession-Resistant Investments
Aside from the stock market, investors also look to government bonds for stable cash flows. But the low interest rates maintained by the federal reserve over the past few years make for pretty meager returns on government bonds.
Other asset classes, like real estate and precious metals, are prevalent components of a recession-resistant portfolio because they don’t always correlate strongly with the stock market. For example, gold tends to hold its value against publicly traded debt and equity markets, even during economic downturns. Historically, certain types of income-producing real estate have followed a similar pattern but with the added benefit of cash yields.
Real estate is a broad asset class encompassing anything from residential to commercial buildings to farmland. With a recession potentially just over the horizon, farmland is a proven choice for those seeking a combination of appreciation and cash yields in a weak economic climate.
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. – paraphrased investment advice from legendary investor Warren Buffett.
Four Reasons to Add Farmland to Your Portfolio
Diversification is an essential aspect of building a resilient portfolio that performs well, even in uncertain economic times. Farmland can be a great addition to your portfolio as it possesses many of the unique benefits of recession-proof financial products.
- Negative Correlation with Other Assets
Investors want to see consistent cash flow and strong returns regardless of what’s happening in the overall economy, especially during a recession. People often make financial decisions based not only on past performance but also on the level of risk that the value will decrease.
Farmland is a wise candidate for diversification because it often moves in the opposite direction of other asset classes, proving itself as a recession-proof asset class. During economic downturns, when the values of cyclical stocks, bonds, and other investments fall, farmland has historically maintained or increased in value.
For example, even as real estate and land values declined during the Great Recession of 2008, farm operations (comprising land, equipment, business, livestock, improvements, and other associated assets) increased by more than 8 percent.
Unlike companies and precious metals, whose valuation is dictated by the open market, crops and land generate income from food (in addition to the value of the land). Creating tangible goods to supply to grocery stores, markets, and the rest of the food supply chain gives farmland an inherent value and makes it relatively recession-proof, particularly as the global population continues to expand.
Compounding this effect, higher purchasing power from a rapidly growing middle-class in nations such as India and China further increases food demand. More money results in better nutrition and a willingness to invest in better dietary choices. For example, China’s food imports have grown from around $14 billion in 2003 to nearly $133 billion in 2019, and this is expected to continue growing.
- Increased Food Demand
As the global population grows, the demand for food and raw materials will expand exponentially. Forbes reports that by 2050, we will need to increase current food production by 70 percent to meet the projected global population of 9.7 billion. Those who invest in farmland will be well-positioned for healthy long-term returns. Even in times of economic crisis, the demand for food and consumer staples remains steady—unlike the market for less essential goods.
It’s not just any food increasing in demand. Consumers, especially in developed countries, are increasingly turning to healthier choices:
- Highly processed, high-sugar food and drinks are being replaced by alternatives such as coconut water and whole food snacks.
- Global spending on organic foods could nearly triple by 2030, reaching almost $500 billion.
- Vegan and vegetarianism, as well as sales of plant-based meat and dairy alternatives, are growing exponentially.
Savvy farmland investors can profit by focusing on these and other similar pockets of opportunity to benefit from rapidly changing global supply and demand.
- Scarcity and Historically High Values
The limited nature of farming real estate improves the likelihood of an increase in long-term value.
The annual NCREIF Farmland Income Index, reports that the value of American farmland has increased by more than 300 percent since 2000. On the other hand, since the 1950s, the percentage of U.S. acreage devoted to farmland has decreased by about 22 percent. As the availability of land dwindles over time, the cost to purchase or rent a farm continues to rise with demand.
Many investors are also considering agricultural real estate in emerging markets. Often these markets are more affordable to invest in, with higher return potential than 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.
- Diverse Opportunities, Independent of the Economic Cycle
Investing in farms doesn’t necessarily mean purchasing land and raising crops or animals. More investors realize the benefits of owning a farm through passive land ownership without setting foot on agricultural land. For example, investors can purchase shares in land and receive proportional returns.
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. You can invest in various interests or geographic areas while avoiding the day-to-day challenges of living on a farm yet still reap the rich returns available from crops, real estate value, and other income streams.
Unlike gold, another asset often used as a safeguard in uncertain times, farmland is a value creator. A farm can produce a range of valuable goods, from limes and coconuts to animal products like milk, wool, meat, and more. And it does this with little correlation to publicly traded markets while the land itself holds value.
Compared to developed markets, Latin American nations provide compelling passive investment opportunities. Colombia, Peru, and Guatemala have been expanding rapidly in the agricultural 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. As the world’s fastest-growing lime exporter, Colombia’s lime and lemon exports have increased by nearly 460 percent since 2015, a massive increase. Some expect these exports, which hit $32 million in 2020, to continue increasing by 20 percent annually.
Farmland as a Recession-Proof Asset
While conventional wisdom might suggest limiting investment activities during an economic recession, strategic asset choices such as farmland can improve the chances of steady returns beyond a down economy. Investing in farmland offers access to a diverse set of opportunities that tend to perform well in hard times, made more attractive by its negative correlation to the global markets coupled with a growing global demand for high-quality food.
Are you ready to learn more about diversifying your portfolio with the intelligent, recession-proof investment that is farmland? Complete the form below to explore passive income investment opportunities with Farmfolio in successful, established Latin American farms.