Billionaires have the kind of investment choices that individual investors can’t even dream of – custom derivatives, private placements, even entire social media networks. So which real estate sector are they flocking to as inflation picks up? Farmland.
Farmland may seem boring, but it’s one of the best historical investments for inflation protection. Let’s discuss the billionaires who invest in farmland, the case for this investment, and how you can get involved with real estate investment trusts (REITs) too. Gladstone Land (EARTH -2.08%) and Agricultural partners (REITs -0.20%).
Shahid Kahn founded auto parts company Flex ‘N Gate in Urbana, Illinois, but is probably most famous for owning the NFL’s Jacksonville Jaguars. Recently, a spokesperson confirmed that one of its entities purchased 24,000 acres of farmland.
Urbana is right in the middle of central Illinois farm country, so Kahn should be very familiar with investing. By April 2021, Kahn had purchased $84 million worth of farmland across 10 central Illinois counties. The purchases began in 2015 and he has likely purchased more since April 2021.
Our next billionaire is Bill Gates, who along with Melinda Gates was the nation’s largest farmland owner before their divorce. Gates’ investment management company is said to have purchased more than 269,000 acres of farmland over the past 10 years.
Finally, Jeff Bezos recently got on the farmland buying spree. Bezos surpassed Gates’ ownership levels earlier this year and now owns 420,000 acres of farmland.
The case for investing in farmland
The best case scenario right now is that farmland is a hedge against inflation. Farmland is leased to a farmer with contingencies for price escalation. If food prices skyrocket, as they are now, the lessor can share in windfall profits.
Of course, all companies with mostly fixed costs hope to see windfall profits as prices rise. What sets farmland apart is the elasticity of the demand curve. When food prices rise, people cannot stop eating. In many sectors where demand is elastic, when prices rise, demand falls. When food prices rise, people will start to store more, but demand is not expected to drop as much.
Inflation protection isn’t the only reason to invest in farmland. The asset also allows investors to diversify their portfolios. The less your various investments are correlated, the more your returns will be constant over time. According to a white paper by fund manager Nuveen, farmland has consistently had positive returns and outperformed the most popular government bonds during the past four U.S. recessions. It also has lower average volatility than US stocks and 10-year Treasuries since 2007. If the stock market crashes, farmland could also be temporarily affected, but it probably won’t end up in the same way. bear market.
How to access farmland
Unlike custom derivatives and entire social networks, there are ways for individuals to invest in farmland. The most popular is Gladstone Land. Gladstone has over 110,000 acres of farmland spread over 164 farms. Its stock has risen nearly 70% in the past six months as investors huddled together for inflation protection.
That doesn’t mean it’s bad value today. The dividend yield is still 1.4% and it trades at just over twice book value. Remember that her book value is based on the price she paid for the farmland. According to a recent management presentation, the value of some of this land may have increased by 162% since 2000.
As food prices continue to rise, Gladstone’s earnings will follow and more investors are likely to buy farmland, which will also drive up the prices of its assets. Profits and assets give the company more ability to build its portfolio and continue to grow.
Farmland Partners is another way to get exposure to farmland. This is a more vertically integrated option. In addition to owning 160,000 acres of farmland, it has recently moved into farmland management (it currently manages an additional 26,000 acres) and will also handle farmland auctions and brokerage.
Farmland Partners has the same exposure to rising food prices in its leases as Gladstone, but it is also more directly exposed to both rising food prices (with the land it manages) and rising farmland prices (with its auction and brokerage business).
It should be noted that none of these REITs have so far been a perfect vehicle for investing in farmland. Farmland Partners spent years in a legal dispute with a short seller who published incorrect information. Gladstone Land has posted remarkable returns over the past year or so since inflation fears began to rise, but it has lagged the market for the previous seven years.
It is possible that both REITs will fail unless there are significant macro headwinds (such as rising food prices) to attract investors. It’s also possible that recent events have given companies the catalyst they need to enter a new phase of growth.
Diversify, diversify, diversify
If the #1 rule of real estate investing is “location, location, location,” the #1 rule of investing, in general, should be “diversify, diversify, diversify.” Farmland offers investors the opportunity to not only hedge their portfolios against inflation, but also potentially protect returns during further stock market crashes. Billionaires are investing in the sector, and if you can handle market lagging returns during bull markets, Gladstone and Farmland Partners could also provide some bear market protection in your portfolio.