农地作为投资资产类别

Farmland has historically outperformed stocks and bonds with double-digit total yearly returns over the past two decades and with very low volatility.

In addition to attractive returns, farmland provides valuable diversification benefits to a traditional portfolio of stocks and bonds.

The expected growth in long-term demand and supply indicates strong fundamentals for continued value appreciation.

We present how we are gaining high yielding exposure to this overlooked asset class.

Believe it or not, farmland has historically been one of the strongest performing asset classes - beating stocks, bonds, REITs... you name it. The average annual return has been over 10% for the past four decades:

source

Interestingly, this high rate of return did not correlate with high risk or volatility. In fact, farmland also was one of the least volatile asset classes during this time frame – proving that high return can correlate with low risk, at least in the case of farmland.

Warren Buffett understood this early on and bought a 400-acre piece of farmland in 1996.

The legendary investor has been touting the investment characteristics of farmland ever since and yet most investors continue to ignore the asset class altogether.

All of this originates from the thought process that you should “

buy land, because they are not making anymore of it.

”

The demand for land, and what it produces, is ever rising, but the supply is strictly limited. What happens when demand consistently exceeds supply? Prices have to rise – which is why you should consider an investment in farmland. It appreciates at an attractive rate and pays you a good yield while you wait for the demand / supply imbalance to widen.

Over the next 30 years the United Nations forecasts global population will increase to nearly 10 billion. This represents a ~30% increase from 2019 and over 2 billion more people to feed.

source

What I find fascinating is that the world population has only started to post fast growth during the last two centuries. According to these estimates, we have not been properly growing for a long period yet and the real growth is still ahead of us. The compounding growth effect is very strong and the result is that the best days for farmland and other real estate assets might still be long in the future.

We were only 2.7 billion in 1955. Today, we are 7.4 billion and by 2050, we are expected to approach the 10 billion. The potential impact on values and rents of farmland are substantial as all these people will need to get fed.

Moreover it has been demonstrated time and time again that when standards of living improve, people tend to increase their consumption of protein including beef, poultry, pork, dairy… which then results in greater need for livestock and more feed grain from farmland.

This positive correlation between protein consumption and demand for corn and soybean is well demonstrated in the below chart. When income per household rose in China, their protein consumption increased exponentially, which caused a large surge in demand for grain feed.

Source: USDA

The farmland commodity markets are global and US farmland is greatly benefiting from the increased demand with exports hitting all-time highs:

Source: USDA

China accounts for a large portion of today's global demand growth for corn and soybeans, but India and other emerging countries are expected to follow the same route in the future as their standards of living improve.

Significant global population growth combined with increasing demand for protein from emerging countries will result in rapid demand increases for agricultural commodities in the future. The United Nations estimate that world food production will need to increase by 60% in order to meet the increasing demand, so the question is: Can the production increase as much as the demand?

There are two ways to increase global production of agricultural commodities: Improve farmland productivity or simply add capacity.

Both seem highly unlikely to add considerable new supply in the future. This is because:

Do we know where farmland prices are headed next year? No, we don’t. But we do know that there is a lot of money to be made in the long run.

There's a clear case of market imbalance with steadily growing demand and only limited supply growth potential, if any at all. This is why farmland values have been steadily increasing over the past decades. Today, the same economic drivers remain in place and are expected to result in further growth for investors.

The beauty here is that while you wait, you earn steady cash flow from leasing the land to farmers. Yield levels depend on land quality, but most properties appear to range between 4%-6%. Add a bit of leverage and price appreciation, you can reasonably expect double-digit total returns in the long run – from a low risk asset – which provides valuable diversification benefits.

Now it makes more sense why Warren Buffett bought farmland early on. It's not too late and we recently joined the club with an addition to our Portfolio.

There are four main approaches to invest in farmland:

Each approach and investment has its own advantages and drawbacks that we describe below:

I believe that buying farmland directly in the private market is a bad idea for 99% of investors out there. Buying and managing farmland demands a very specific set of skills, and in most cases, it's far wiser to have a team of farmland professionals make these decisions on your behalf. Moreover, most individuals just don't possess the resources to create a well-diversified portfolio of farmland, either by geography or by crop type. In consequence, most direct farmland investors will remain highly concentrated in a few locations and crop types. Being concentrated can sometimes lead to higher returns, but it's also clearly riskier.

The second alternative is to invest in a private partnership. This solution solves some of the issues from investing directly in farmland. It enables individual investors to profit from professional management and gain exposure to the diversified-returns of farmland.

The problem with private partnerships is that they will generally require significant investment volumes, have high fees, and suffer from conflicts on interest. They may not allow appropriate diversification due to high required minimum investments.

The third option is to use crowdfunding services of a company such as

- a boutique technology-enabled investment firm that helps investors access farmland investment opportunities.

We recently conducted an interview with the CEO of the company. You can read it by clicking here.

It appears to be a good option for certain accredited investors as it allows you to efficiently diversify in a wide variety of farmland investments.

The last option is to invest in the shares of REITs which allow you to gain indirect exposure to farmland through publicly traded vehicles. At High Yield Landlord, we specialize in investing in such publicly-traded real asset companies because they combine the best of financial assets and real assets under one vehicle:

Financial assets:

Real assets:

Here we have two main possibilities: Invest in the common shares or invest in the preferred shares of REITs.

Source: author

Unfortunately, choices are very limited here. There exists only two Farmland REITs, Farmland Partners (FPI) and Gladstone Land (LAND).

We believe that both could make good long term investments, but they do not provide the resilience that we are looking for.

With our farmland investment, what matters most to us is resilience, diversification, and income. In this sense, we are turned off by the high volatility of the common shares and leave them for more aggressive investors.

It leaves us with one last option: The preferred shares of Farmland Partners and Gladstone Land. This is our favorite approach to gain farmland exposure because:

We believe that both REITs have solid operations with quality assets, a reasonable balance sheet and well-aligned management. Gladstone has a better track record, but we still favor the preferred shares of Farmland Partners due to four main reasons:

For a farmland investment, we consider this risk-to-reward particularly appealing as we get to enjoy high income through the preferred structure but still participate in the appreciation of farmland. This is what makes FPI.PB the most attractive Farmland investment in our opinion today.

Farmland has a strong investment story and we are investing in it. Our Real Asset Portfolio allows us to generate over $5,000 in annual passive income from a small $70,000 portfolio.

Compared to traditional equities, our real asset portfolio also enjoys much more reasonable valuation metrics trading at:

We expect this approach to strongly outperform traditional stocks and bonds which are priced for perfection right now. Our Real Asset approach is in many regards safer and more opportunistic. The cash flow is more resilient and more of it ends up in our pocket (~7.2% current dividend yield).

We are not alone to believe so. Over the coming 5-10 years, nearly $40 trillion (yes, with a “t”) is expected to shift toward real asset investments such as farmland:

source

As the saying goes...

With more and more capital chasing a limited number of deals, we expect farmland and real assets in general to continue outperforming financial assets (stocks and bonds) over the coming decades.

I/we have no positions in any stocks mentioned, but may initiate a long position in FPI.PB, FPI, LAND over the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.