Natural assets’ performance in turbulent times
In the intricate web of global economics, the positive correlation between commodity prices and inflation expectations has emerged as a consistent pattern. This synergistic relationship – regularly monitored by investors like Blackrock – has allowed for tactical solutions to help hedge against economic volatility and inflation.
Over the past 18 months, inflation rates have been above the targets set by central bankers. The Federal Reserve sets its inflation target at 2%, yet consumer prices for all items rose 6.5% from December 2021 to December 2022, according to the Bureau of Labor Statistics. While several asset classes lost value during this period, assets that derive their value from natural resources delivered respectable returns for investors.
Precious metals like gold are perhaps the most straightforward example of this. SPDR Gold Shares is up by approximately 15% over the past 12 months, as of July 2023. Similarly, the price of silver has surged over the past year; the annual return on iShares Silver Trust is 9.5% over a similar period.
Crude oil, which is sometimes called “black gold” by investors and economists, has had a similar run since last July. The Vanguard Energy ETF – which holds positions in major oil and gas stocks – is up roughly 16% over the past year.
Infrastructure built with natural materials has also seen positive growth over this tumultuous period. The total annual return on iShares U.S. Infrastructure ETF – which holds positions in manufacturers like Greenbrier Companies and builders like the Boise Cascade Company – was 17.24% between July 2022 to 2023.
The NCREIF Farmland Index, the benchmark for U.S. farmland, is up 8.2% year over year. Historically, farmland investments have shown resilience against rising inflation with higher crop prices tending to result in higher farm incomes, and, in turn, higher land values. Average cropland values reached a record $5,050 per acre in 2022, up 14% from 2021.
Compared to most other assets, including gold and real estate, farmland had a stronger year, demostrated in the chart below:
The historical resilience of farmland
As a tangible, historically low-volatility asset, farmland can provide investors today with a defensive characteristic that can help shield portfolios from market downturns and economic uncertainties. Its historical stability – bolstered by persistent demand for agricultural goods – and low correlation to traditional asset classes renders it a prudent complement to both traditional assets and other natural assets.
Farmland’s strong performance over the last year is driven, in large part, by the asset’s historical stability. Farmland is distinct because of its role in sustaining the human population; unlike precious metals, for example, farmland serves the critical purpose of producing agricultural products. As a result, farmland investments tend to experience less volatility than competing assets.
Although the energy sector outperformed farmland during 2022, it can be more volatile as an asset class. The standard deviation of the Vanguard Energy ETF has been 35.4% over the past three years. By comparison, farmland’s standard deviation was just 3.39% from 2020 to 2022. Looking at long-term performance, farmland experienced a standard deviation of 6.64% between 1992 and 2022, demonstrating that farmland returns have remained consistent over extended periods of time – even during economic downturns.
Similarly, despite posting strong returns over the last 12 months, many precious metals experienced more modest returns in 2022; the SPDR Gold Trust was flat and iShares Silver Trust was up 3.19%. Meanwhile, farmland posted a net positive return of over 9% over the course of 2022, according to research by FarmTogether.
And, unlike infrastructure, farmland is less leveraged, with debt-to-asset ratios under 15% for agricultural land between 2000 and 2019, and 44% for average infrastructure funds and investment trusts within the first quarter of 2022.
As demonstrated in the chart below, farmland has also been significantly less correlated with major asset classes and has delivered higher annualized returns than bonds, with lower volatility than equities, over the past 30 years. Bear in mind that this period saw multiple economic crises such as the Dot-Com bubble of the early 2000s, the financial crisis of 2008 and the COVID-19 pandemic of 2020.
Accessing this once overlooked opportunity
Historically, this asset class has had high barriers to entry. Investing in farmland required significant expertise, a well-established network within the industry and substantial capital. These barriers have been lowered by investment manager FarmTogether.
With over 45 properties and more than $175 million in assets under management, FarmTogether is enabling greater access for both accredited individual and institutional investors looking to venture into U.S. farmland.
FarmTogether’s all-in-one digital platform features various crowdfunding offerings for accredited investors – each handpicked and assessed by an experienced team of professionals. In addition, this team offers its expertise to investors seeking exclusive ownership of specific farmland properties via their Bespoke offerings, or those who are looking for diversified exposure to a portfolio of farms via their Sustainable Farmland Fund.
FarmTogether is enabling investors to help protect their capital during this unpredictable economic climate with U.S. farmland, a historically attractive, stable asset.