A closer look at traditional savings investments
So far in 2023, people have flocked to assets outside of equities in search of stability. Given the hard slide of stocks in 2022 — the Dow dropped close to 9%, the S&P 500 more than 19% and the Russell 300 more than 20% — the low-but-safe returns have looked attractive.
As of mid-June, a 5-year U.S. Treasury offers a yield of 3.92%; a 10-year Treasury 3.61%; and a one-year bank certificate of deposit can boast 5% or more.
Yet, with inflation steadying to 4% year-over-year — less than half of what it was in June 2022, at 9% — it remains to be seen how those rates will fluctuate in the back half of the year.
Savings vehicles may not be purpose-built to take advantage of improving economic conditions that could set the stage for asset appreciation. As the interest rate situation stabilizes, we may see this play out in real time.
The Federal Reserve chose to leave rates unchanged at its June meeting. Though it signalled future hikes were not out of the question, many observers believe the end may be in sight. Preston Caldwell, a senior U.S. economist for Morningstar, forecasts that rates will begin to drop by the end of the year, "falling to about 2.00% by the end of 2024."
The historic stability of long-term bonds is well documented. Dating to 1974, the Bloomberg US Aggregate Bond Index finished positive in all but six years. However, it’s not immune to losses; climbing interest rates, for example, can have a negative impact — one of these negative years was 2022, when the Index fell a record 13%.
What’s more, the locked rate or coupon yield a bond pays does not grow the original investment. While you may earn a certain rate of interest in the meantime, a $10,000 10-year bond will only return $10,000 once it matures and the interest is paid out.
The challenge for many investors, then, has been to find an asset class that can offer the benefits of stability alongside long-term appreciation. For this reason, farmland might be worth considering as an investment option.
Farmland’s long-term viability versus fixed-income investments
From 1992 to 2001, farmland investments posted 72 consecutive quarters of positive annual returns, and between 2000 and 2019, private farmland investments posted income returns of at least 4% every year. That makes the historical yields of farmland just as attractive as certificates of deposit and high-interest savings accounts.
Like traditional savings accounts, farmland has historically offered investors relatively low volatility. The standard deviation for farmland was 6.64% between 1992 and 2022, according to data collected by farmland investment manager FarmTogether — compare that to U.S. stocks and real estate at 17.8% and 7.62% during the same time period.
However, traditional fixed-income assets differ from farmland in several respects, chiefly appreciation potential. U.S. Department of Agriculture statistics show that average farm real estate values have risen 75% since 2008, while the average value of an acre of cropland in 2008 – $2,760 – reached $5,050 in 2022, a jump of 83%.
Based on this historical performance, farmland values are not likely to remain flat in terms of capital growth in the long term. A number of factors have driven farmland’s steady growth in value, from decreasing land supply to global population growth. Based on current projections, many people alive today will live to see a world crowded with more than 10 billion hungry mouths.
Thus, while farmland and traditional savings accounts may both provide stable income throughout volatile markets, farmland has the added value that comes with the appreciation of the underlying asset. Farmland has delivered strong risk-adjusted returns over the last 30 years: Since 1992, farmland has posted an average annual return of 10.71%, compared to 4.64% for U.S. bonds, according to statistics collected by FarmTogether in its paper "Farmland: A Historically Stable Asset During Uncertain Times."
Farmland can also help provide a hedge against inflation because its value is inherently tied to food prices. When the cost of food goes up, so too should the value of the farmland that produces it. The USDA's Economic Research Service reports that in 2021, food prices increased by 3.9%. In 2022, the average price of an acre of cropland rose 14.3%, USDA statistics show.
As a result, farmland has historically had a positive correlation to the U.S. Consumer Price Index in both the short and long term: 0.97 from 2020 to 2022 and 0.17 from 1992 to 2022, the former a near-perfect correlation to rising prices.
FarmTogether brings it together
In an era of heightened macroeconomic uncertainty, farmland can offer investors the yield and downside protection that traditional savings accounts can, while offering the potential for long-term growth.
Farmland investment manager FarmTogether makes it easy to invest in farmland. Through its platform, investors can browse investments, review due diligence materials and seamlessly sign legal documents.
You can access a variety of investment products, including crowdfunded deals, bespoke offerings and its Sustainable Farmland Fund. The firm also facilitates 1031 exchanges.
Currently, investors can take advantage of a rare opportunity to invest in 65 planted acres of diversified citrus grove in the heart of the Citrus Belt in Tulare County, California. FarmTogether’s Golden Citrus Orchard is modelled as a 10-year hold with a target net IRR of 10%, a target net average cash yield of 6.3% and a target multiple on invested capital of 2.4x.
For those ready to take advantage of all farmland has to offer, both historical performance and current investment conditions across markets make it clear: Now is an attractive time to get started.
This communication is not intended to be relied upon as advice to investors or potential investors and does not take into account the investment objectives, financial situation, or needs of any investor. All investors should consider such factors and risks in consultation with a professional advisor of their choosing when deciding if an investment is appropriate. Historical data is not indicative of future results and may not reflect fees which may reduce actual returns. Any historical information is illustrative in nature and may not represent future results, therefore any investor investing through the FarmTogether platform may experience different returns from examples and projections provided herein.
Data representative from January 1992 through December 2022. Sources: Privately Held U.S. Farmland - NCREIF Farmland Index; Privately Held U.S. Commercial Real Estate - NCREIF Real Estate Index; Stocks - S&P 500; Bonds - Bloomberg Barclays U.S. Aggregate Index; Gold - Federal Reserve Bank of St. Louis Economic Data (FRED). Indexes are unmanaged and not available for direct investment.
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