When you consider annual earnings, security of principle and appreciation, American farmland is a solid performer. Farmland’s performance is driven by an increasing value of the crops it supports.
Demand From Home and Abroad
There will continue to be solid demand for all of America’s crops but especially those crops which can be used as feed for animals. World population growth will add another one billion people in the next 12 years. This fact is already pressuring the world’s food resources dangerously close to their breaking point. Low worldwide carryover of grain stocks will force price rationing.
China and India are voracious consumers of the world’s grain. Their diets are changing to include more protein and the demand for grain for feed will increase also. Since it takes roughly four pounds of corn to produce one pound of pork, a 10% increase in pork production requires an additional 1.1 billion bushels of corn (2011 US corn crop was 12.4 billion bushels). China’s growing middle class, is already larger than the US’s entire population, will continue to demand more pork, beef, milk and cheese into their diet.
Some have linked the Arab Spring uprisings of 2011 to the failed Ukrainian wheat harvest of 2010. Higher wheat prices provided a catalyst for protestors in Tunisia, Bahrain, Egypt and Libya to take to the streets risking life and limb to protest high food prices, corrupt politicians and totalitarian regimes. China took notice and increased its grain purchases in the world markets to help mitigate these pressures at home. They also stepped up direct investment of several farming projects worldwide.
US farmland benefits from these changing emerging markets without having the risks associated with a direct foreign investment in these markets.
Ethanol production currently uses nearly 40% of the US corn crop and is growing. As other bio-fuels like switch grass come online, they too will compete with corn and soybeans for high quality ground.
The American Farmer
The American farmer has been the greatest recipient of the changes in foreign and domestic demand. In addition, government backed revenue insurance has greatly reduced the downside risk for the farmer. This safety net enables him to purchase larger more efficient equipment to work more land in less time thus increasing his productivity and profitability.
Advances are continually being made to the corn plant genetics. Increased yields, a greater resistance to pests and an increased ability to grow under drought-like conditions are just some of the advances being made.
This increase in profitability has left the farmer in a very strong financial position. Gone are the days of heavy leverage in the farm sector. The crash in farmland values during the 1980s was the result of over leverage and speculation. Much of today’s farmland is purchased with cash by the local farmer. The strength of his balance sheet allows him to be the most aggressive bidder for land.
A Hedge Against Inflation
Using farmland can be an effective hedge against inflation. Since 1970 farmland has been positively correlated with inflation while returning 11.9% and exhibiting less volatility than traditional asset classes. These assets such as equities, bonds and commercial real estate are all positively correlated to each other while showing a low correlation to farmland. Farmland provides true portfolio diversification with less volatility. Farmland can be a better inflation hedge than gold since it has provided both real long term capital appreciation of 4-6% per year and a reliable current yield cash flow of 3-6% per year. Thus, it acts like gold with a coupon.
Because of farmland’s positive attributes there has been an increasing institutional awareness. Institutions currently hold less than 2% of all farmland in the United States. There are only 2 institutions which manage more than a billion dollars of farmland compared to over 100 which manage that same amount in stocks and bonds.
“Buy land, they ain’t making anymore of it” Mark Twain.