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October 5, 2021

Farmland Investing: An Inflation Hedge

Everyone's got to eat.


Even when times get tough, like during a global pandemic, one thing stayed the same. People need to eat. Vegan, vegetarian, or just a regular diet, all of that food needs to come from somewhere. The source of that food is farmers.

Just based on that factor alone, it seems that farmland would be an excellent investment. But due to market instability, it is essential to understand if farmland is a good inflation hedge. 


Historically, gold has been the most common inflation hedge investment. However, some investments tend to outperform others. For example, during a pandemic, toilet paper became almost worth as much as gold.  


Good, bad, and everything in-between, some investments are better choices than others. 


Everyone has to eat, but does that mean farmland investing is a good move?‍‍

 

We Live In An Era Of Farmland Financialization And Consolidation


Throughout history, classifying farming as a business has always been an open discussion. Family-owned and operated farms and consolidated land ownership have consistently debated this idea. After all, many farmlands were owned by wealthy families passed down through multiple generations. Or, if there were no tenant farmers available, these landowners would hire laborers to handle the crops. 


Throughout American history, farms were commonly owned and operated by families rather than companies. Currently, more farms are switching over their operations to increase their productivity and allow them to buy and farm more land.


Bill Gates is the largest overall institutional owner of farmland. This holds some valuable information. Has spoken out about owning farmland as an investment.


"Technological advancements in agriculture have enabled family farms to manage more tillable areas. Larger, more efficient precision-guided tractors, planters, sprayers, and harvesting equipment have reduced the time a farmer must devote to any given field task. This increase in operational productivity has resulted in the expansion of farming operations, with many farm operators seeking additional land that they now have the capacity to farm."


Local family farmers still operate most farms. However, the majority of the value that is produced by farms comes from corporate farm settings.


For example, we can look at dairy farming trends. Back in 1987, the majority of dairy cows were in herds of 80 or less. Fast forward to 2017, and that number grew exponentially to large herds of over 1,000.


"Consolidation in dairy is just dramatic," says MacDonald as quoted in Science Daily, "with shifts to much bigger farms and smaller farms going out of business. The last two years, 15% of the dairy farms in the country went out of business. The very large farms have lower costs than midsize and smaller ones, and while those lower costs reflect productivity growth and result in lower prices for the consumer, it is also pretty heartbreaking for people who have been small or midsize dairy farmers who are going out of business. In 1980 when I started this work, there were probably about 250 thousand dairy farms in the country. Today, we have 30 thousand, and it's going to keep shrinking."


Are you looking for the best way to invest in farmland? With a diminishing supply, connecting with experts is the best way to invest. Contact Income Land today. 

Farmland Hedges Against Inflation


Throughout the years, farmland has been closely compared to gold instead of stocks or real estate investments. This idea holds true because farmland is considered an inflation-protected investment by design even in times of disaster. Because the price of farmland closely correlates with the CPI, there is significant price growth of fresh fruits and vegetables. 


In comparison to the last fifteen years, farmland prices have dropped 35% in correlation to stocks. However, those prices reflect a 53% correlation to gold and 66% to the CPI. This combination of correlations is important.


Other long-duration investments like stocks and REITs entitle shareholders to a portion of the company's cash flow. This key factor is critical to high-yield investors. REITs and stocks perform poorly when inflation rises beyond 4% annually. Farmland is different.


This is where the true power of investing in farmland. The downside is that there aren't always high-yield payoffs, but overall, farmland is protected from inflation. That buffer makes it an excellent asset to add to a high-yield portfolio. This allows farmland investing to be not only a safer investment but an inflation hedge

 

Why Invest In Farmland?


Investors don't consider stocks as a hedge when it comes to inflation. Yet with the stock market handing out returns at all-time highs, finding comparable gains can be difficult. 


Farmland vs. Stocks


When you compare them, there are some significant differences when it comes to investing in farmland and investing in stocks. Both can provide value to an investor's portfolio. Stocks offer long-term holdings and deliver value over time, or can be short-term for a quick return on your investment. 


Stock market investing can be volatile and fluctuate as index prices change. While the index can regain most of its losses is can be a tricky investment to pin down


On the other hand, farmland investing is different. These investments are considered to be low-volatility. This means that they will not fluctuate as drastically as the market swings. Another benefit of investing in farmland is that external factors that can often drive down stock prices don't typically impact the value of farmland. 


Farmlands offer unique investment opportunities. Even when inflation is on the rise, farmland investments tend to stay stable. Producers of grain and agricultural products benefit from the increased prices that inflation brings.

 

Farmland vs. Gold

Usually, when investors consider a hedge against inflation, they often think about gold. While gold is an excellent investment, it does come with its own problems. Investing in gold is more accessible than investing in farmland. Remember, farmland is often owned only by the wealthy. 


Gold does keep pace with inflation, even outpacing it at times. However, no cash flow is commonly excluded in the equation when it comes to gold. Farmland, on the other hand, offers investors the best of both worlds. 


Farmland allows for a stable investment and each harvest offers cash flow to farmers. If a farmer has a better year, there is more cash income. There are also options for taking fractional ownership of farmland, including crowdfunding


Just like all resources, farmland in America has a limited supply, and that supply decreases every year. This only increases the value of farmland because people need to eat. Because of this, many investors believe that farmland will outpace gold over the next few decades. 


Accessing Farmland As An Investment


At one point, investors who wanted to invest in agriculture had only ETFs or direct ownership options. ETFs were a less appealing option due to their less than impressive returns. Direct ownership, however, requires time, quite a bit of funding, and a little more knowledge about investing that many investors don't have. 


If you are worried about keeping your investment safe even during times of economic certainty, investing in farmland is an excellent option. 


However, buying a farm isn't accessible for everyone who is looking to invest. These investments can often require a large initial capital commitment. There are other options for more people to be able to invest in farmland.


Here are a few different ways to invest in farmland and protect against inflation:


  • Farm REITs. REITs are the best way to invest in a farm without actually owning the farm itself.
  • Agriculture Stocks. These stocks allow investors access to a variety of publicly traded companies within the farming sector. This includes companies that help with the production of crops and those that work within the farming industry. 
  • Ag ETFs. These help to add diversity to the agriculture sector. 
  • Ag Mutual Funds. Those mutual funds invest in the farming and agriculture industries.
  • Soft Commodities. These are investments in grown commodities. 


Farmland seems to be the ultimate investment opportunity due to its positive correlation with inflation. It beats out bonds, stocks, and even the timeless classic, gold. There seems to be no other investment that offers a hedge against inflation like farmland.


Fear Inflation? Buy Farmland Through Land Income


Does the thought of losing your investment to inflation scare you? With rapid swings in the investment market, it can be a gamble. 


Land Income Analyzes Water Supplies For Smart Investing


Land Income has an investment process that analyzes hundreds of properties across California. This allows them to find the best investment opportunities rather than only focusing on local areas. They keep a keen watch for any farmland that has water access. This helps to improve the value of farmland.


Land Income looks for a minimum of two sources of water; functioning wells, an irrigation district, and a sustainable aquifer. They improve the value of farmland by utilizing state-of-the-art technology to help lower operating costs while increasing productivity. 


Some enhancements include:


  • Selecting the newest, most advanced varieties for disease resistance
  • Choosing the best rootstock for the local properties soil type and weather conditions.
  • Installing high-tech irrigation systems to reduce and prioritize water usage and efficiency.



Conclusion

While you can invest in many different ways, adding farmland to your investment portfolio is an excellent inflation hedge. There are also quite a few ways that you can invest in these recession-proof assets.


Are you ready to invest in a hedge? Farmland investing is your key to inflation-proof investments. Contact Land Income today to learn more about your options.

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