November 15, 2018
A search for practical ways to include farmland in an investment portfolio
When it comes to inflation hedges, farmland appears to be uniquely attractive. It is hard asset that produces regular income by producing food, a product that will never cease to be in demand. But do farmland prices actually track inflation in a meaningful way? What are the best options for investment, direct ownership, private partnerships or listed stocks? This article is the first in a series of posts that will discuss farmland’s potential value as part of a diversified portfolio and review some potential candidates for investment.
Let’s first consider farmland’s potential value as an inflation hedge. General inflation, as in the sharply rising cost of daily items, has not been a serious issue since the 1970's in the U.S.
Another way to look at inflation is through the purchasing power of the Dollar. If it takes more currency over time to buy the same amount of goods, the relative price in local currency is inflating. Once the U.S. Dollar was delinked from gold (a hard asset) in 1971, it has been steadily declining in purchasing power to this day.
Investing in hard assets that hold their value during inflationary periods or the relentless decline in currency purchasing power would certainly be helpful for a portfolio. U.S. farmland prices have tended to show a relatively high correlation with inflation in the past. TIAA-CREF is a huge institutional investor and they have been a big proponent of farmland. They teamed up with Illinois University to create the TIAA-CREF Center for Farmland Research. According to their data, the price trends in farmland prices (base on 32 of the major U.S. farming states) were about 65% correlated with the CPI and PPI from 1970 to 2012. The table below shows how various categories of asset prices compared with their custom farmland price index. At the top of the table are assets that were least correlated to farmland, equities leading the way as notable inverse correlation. At the bottom are things most correlated with farmland prices, the PPI and CPI inflation indices were highly in tune with ag land. According to this data, farmland prices did not track the stock market but did follow inflation - exactly what we are looking for.
In this analysis, we are considering passive investments in farmland rather than buying into farm businesses (though we will look at some farming companies, private and listed in the future). One way to value farmland alone, like any cash generating asset, is by looking at its cash flow through rent. Recently, the cash flows from leasing farmland has been declining while land prices have held steady, thereby lowering yields for land owners. This has led some to consider U.S. farmland overvalued at this time. The answer is probably more complex though. There appears to be a correlation between long-term interest rates and leasing rates. The chart below shows the return on farmland compared with 10-year Treasury interest rates. Lease rates have generally tracked Treasury rates lower over time (the big jump in yields in the 80's is when prices collapsed faster than leasing rates).
Constant 10 Treasury bond rate (CMT) versus the rent to farmland price relationship (most farm states in the US show the same relationship as IL)
One way to interpret this correlation is to expect higher rental yields if inflation causes long-term interest rates to rise. Higher interest rates are normally bad for real estate related assets, but U.S. farmers are not carrying much leverage at this time, especially compared with the 1980's when over borrowing was one of the reasons farm businesses and land prices collapsed. As of 2017, borrowing for farmland was only $236 billion which was just 9.4% of the value total value of farm real estate.
The total returns for farmland have been relatively good in the past compared other standard asset classes. The table below breaks the returns into two periods ending in 2012, one starting in 1970 and the other more recently, in 1990. (I will update this blog post once more current data is available.)
US Ave Select 32 is an average of the prices for 32 farm states in the US.
Farmland as an investment has been very good compared with other assets, second best in each time period above. Additionally, these returns have come with relatively low volatility as measured by standard deviation. The correlation data compares each asset or index with farmland prices ("US Ave Select 32"). Here again the data shows a very high past correlation for farmland versus inflation indices (PPI and CPI); neutral with bonds (AAA, BAA, TCM10Y) and negatively correlated to stocks (S&P 500).
In summary, farmland has shown real value as an inflation and purchasing power hedge and it also has also produced some relatively high returns that were non-correlated to equities. The future does not have to be the same as the past, but the data does support the thesis that farmland is at its core, one of the most basic hard assets that should reflect changes in inflation. That being the case, the next question is how to include farmland in balanced portfolio in a practical manner. Future blog posts in this series about farmland will review some exchange-listed and private companies along with a few limited partnerships. The following is a list of candidates at this time. This is not all-inclusive, so if you have any suggestions, please feel free to email me through the contact page of the website.
Listed equities
Gladstone Land (LAND) – Farmland leasing REIT in the United States
Advance Terra (6A6) – Farmland leasing REIT in Bulgaria
Adecoagro S.A. (AGRO) – Sugar, rice and dairy producer in Argentina
Cresud S.A.C.I.F. y A. (CRESY) – Sugar, cattle and dairy producer in Argentina
BrasilAgro (LND) – Farmland development and leasing company in Brazil
Limoneira Company (LMNR) – Citrus and other fruit producer in California
Alico, Inc. (ALCO) – Citrus producer in Florida
Private Companies
Vulpes Agriculture Land Development Co. - Avocado and kiwi farms in New Zealand
Private Funds
Ceres Farms – Farmland ownership and leasing fund focused on U.S. Midwest states