Will Farmland or Equities Perform Better in 2023?

How farmland can deliver more consistent returns instead of trying to time the market.

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When inflation rates started skyrocketing during the second half of 2021, many expected a quick return to normal levels. But those “expert” predictions soon proved wrong, as during the summer of 2022, the U.S. saw inflation above 9 percent, the highest rate in over 40 years.

Although higher than much of the past four decades, inflation has started to moderate. Forecasters, including the Fed, expect it to cool to around 3 percent by year-end.

But ongoing inflation, the Fed’s rate hikes, and general uncertainty have kept equity market expectations for 2023 modest. Some forecasters expect a rough road similar to 2022, with a weak economy continuing until interest rates drop, while others anticipate modest gains for the S&P 500.

The likelihood of continued challenges facing the stock market in 2023 could lead many savvy investors to look for investments that grow regardless of global economic conditions.

Historically farmland has been one of these resilient asset classes. It has often outperformed the equities market, leading to a central investing question: which will prove to be a better choice in 2023, farmland or equities?

Why forecasts are almost always wrong

Maybe you’ve experienced firsthand how economic outlooks can be unreliable at best. Sometimes, they're not just incorrect, but way off the mark.

Why are financial forecasts frequently wrong? Several factors contribute to why they miss the mark, and the answer relates to how most people think about the future.

Economists (and most people) primarily base their predictions on historical data, assuming that current trends and trajectories will continue indefinitely. Further, confirmation bias, the tendency to only see evidence that supports what we already believe and ignore that which contradicts it, increases the likelihood of exclusively focusing on information that reinforces our current expectations.

However, many real-world events don’t fit historical patterns and are challenging to foresee. For example, the magnitude and duration of inflation that started in late 2021 surprised many, and it continues to drive uncertainty in the equity markets.

Will inflation continue in 2023?

The factors that drove inflation and kept the economy churning in 2022 can be hard to predict. In many ways, the global economy was much more resilient than people expected.

Although there are reasons to believe inflation will slow in 2023, it's a mistake to focus on the good news and ignore the offsetting bad news. Many optimistic inflation forecasts neglect the downsides: bringing inflation back to regular rates means lowering demand.

Low unemployment and rapid wage growth are signs of a strong economy, but they are also significant factors driving inflation.

Money becomes more costly when the Fed raises interest rates, its most effective lever. More expensive money moves slower through the financial system, pumping the brakes on everything from housing construction to air travel and restaurant spending. This inevitably has repercussions on equities and the various financial markets.

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What else have experts gotten wrong lately?

Many try to assess current events and predict where the stock market will be in six months or at the end of the year. For example, there are multiple factors and potential indicators for a global recession:

• High inflation
• Rising interest rates
• Ongoing war in Ukraine
• Inverted yield curve
• Rising energy prices

But no matter how hard experts try, it seems like economic forecasts are nearly always wrong. The track record of predicting equities, stock markets, and inflation leaves much to be desired.

Case Study: The S&P 500 forecast for 2022

Like inflation forecasts, the stock market expectations in 2022 were stable yet optimistic. The consensus estimate was for the S&P 500 to end 2022 above 4,800—a slight increase from 2021.

The reality? The index declined around 20 percent and closed the year at 3,840.

This example emphasizes the importance of following a consistent investment strategy rather than trying to time the market and jump in and out based on pundit expectations. Slow and steady is often the best option for generating stable long-term returns and, in most cases, should be prioritized over trying to predict market behavior.

Does the 2023 equities forecast look any better?

The world faces ongoing headwinds in 2023, especially during the first half of the year.

Although a global recession appears unlikely, JP Morgan Research expects markets to re-test 2022’s lows for as long as the Fed keeps interest rates up. And unfortunately, it could take a while to achieve its 2 percent inflation target.

Nonetheless, it seems many analysts hold market expectations for 2023 that are similar to those for 2022: slightly positive outlook, with gains hovering around zero.

Like many commodities, from precious metals to petroleum, stock prices heavily depend on market sentiment, and investor expectations can play a more significant factor than underlying fundamentals. Our complex and interconnected world makes accurate predictions for the future incredibly difficult.

With a flat outlook for equity returns in 2023, and the challenge of taking market predictions at face value, what if you stuck to an approach that favors more predictable long-term trends?

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Inflation- and recession-resistant: An investment strategy for the long run

What might a better long-term investment strategy look like for investors? It means choosing assets that deliver strong growth year after year, and it means investing in opportunities that generate strong returns regardless of global economic conditions.

In short, it means picking asset classes like farmland.

The many reasons to choose farmland

Historically, farmland has performed well both during bear and bull markets. Whether the economy is down and people are traveling or spending less, or growth is abundant and GDP is expanding, farmland has historically kept pace with, and often exceeded, the returns of many other asset classes. This performance has not gone unnoticed, as astute investors like Bill Gates and Warren Buffett have chosen farmland because of the variety of benefits it can provide.

This recession- and inflation-resistant asset class also allows investors to benefit from the dual wealth-producing streams of increasing land values and income from crop yields.

Farmland investors benefit from land appreciation

Land often increases in value as time progresses. Due to heatflation, climate change, and shifting land-use priorities, the amount of available agricultural land in many developed countries is becoming increasingly scarce. Many speculate that we have already passed what is often referred to as peak farmland.

The laws of market dynamics reinforce the principle that lower supply in the face of consistent demand helps keep farmland prices stable or growing. Thus, agriculture investors have the opportunity to generate strong returns, year after year, from land appreciation and rent payments.

Crop yields provide additional returns

However, farmland has another core benefit compared to standard commercial and residential real estate. A steadily growing global population means demand for food and agricultural land isn’t going anywhere.

People still need to eat in periods of high inflation and economic turmoil. Not only does ongoing demand for farmland drive increasing land values, but crop yields also produce recurring returns season after season.

Historically positive

Over the past 30 years, Farmland’s dual wealth-generating streams have helped it with consistently positive returns.

Even during the great recession of 2008, when the equities markets crashed, agriculture rewarded investors handsomely. Because crops provide income from food, farmland maintains an inherent value that’s not correlated to demand for stocks, precious metals, or other commodities. This stability also makes farmland a powerful lever for portfolio diversification in uncertain times.

Where are great farmland opportunities?

If the developed world has passed peak farmland, and heatflation is pushing agricultural production out of traditional agricultural havens like California, where should you look for opportunities?

There’s a growing trend toward nearshoring in the global economy. For U.S.-based investors and consumers, that typically means shifting from an Asia-based supply chain to sourcing closer to home.

Regional emerging market economies pose an obvious choice for the many aspects of the U.S. economy involving hard goods. Agriculture investors, for example, can benefit significantly from the opportunities available in nearby Latin America.

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Why Colombia is ideal for farmland investment

Long growing seasons, diverse climates, and short transportation lines to major U.S. cities make Colombia an ideal choice for farmland investment.

The country’s ideal geostrategic location between the Atlantic and Pacific oceans, plentiful natural resources, and diverse climate make its farmland a low-risk, high-reward opportunity for investors.

What’s more, Colombia’s new government plans to shift its economy from a traditional dependence on extractive industries toward something more sustainable. In other words, the push to nearshoring in the U.S. coincides perfectly with Colombia’s desire to reinvent its economic engine.

Is farmland or equities a better investment choice in 2023?

Many analysts expect a bumpy yet largely stable road for equities in 2023 despite the numerous economic headwinds. But it’s essential to note that this was also the expectation for 2022, and the S&P 500 declined by nearly 20 percent.

Stock market investing based on forecasted economic conditions and expected future prices is unreliable at best. Instead, pivoting to a slow and steady approach that includes agriculture in emerging markets like Colombia might be a better strategy for most investors.

Farmland’s powerful advantages and multiple income streams have consistently led to stable, positive returns over the past 30 years. Further, Colombia is actively promoting a shift from extractive industries to more sustainable initiatives, like farming. This shift makes it incredibly attractive for investors seeking farmland investment opportunities.

If you want to learn more about adding what many consider to be a safer alternative to equities to your investment portfolio, fill out the form below and one of our farmland experts will be in touch.