September 22, 2023

Here’s why buying a piece of America can be an inflation hedge

(Bloomberg) — In an era of historic inflation, one alternative asset has made its way into portfolios as a diversification and potential hedge against persistent price pressure: farmland.

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“In fact, it has been shown to be more inflation-linked than gold, as it tends to outperform in times of high inflation or sustained inflation,” said Carter Malloy, founder of AcreTrader, an Arkansas farmland investment firm. “And also that it just doesn’t have much correlation to other asset classes. It is almost exactly zero in its correlation to the S&P.”

Malloy joined the What Goes Up podcast to talk about the company and the process of investing in farmland. Here are some highlights from the conversation, condensed and edited for clarity. Click here to listen to the full podcast or subscribe below to Apple Podcasts, Spotify or wherever you listen.

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Q: How does AcreTrader work and who is your investor base?

A: They are accredited investors on the platform – which ranges from people in cities to rural farmers and people who live near agriculture, to also institutions – family offices, etc. The goal for most people is to get some stability and some diversification. That’s often why we see people with real interest in farmland — that slow and steady compounding that it can offer investors.

Q: And it’s not really correlated with risky assets or even Treasuries. It is related to inflation to some extent. Talk to us about what to expect from that return profile and volatility as an agricultural land investor.

A: First, it’s important to consider what agricultural land is not. Farmland is not a get-rich-quick plan. You rarely hear people say, “Oh my God, I doubled my money on my farmland investment this year.” Conversely, you don’t hear people say, ‘oh my god, I lost all my money on farmland this year.’ So what investors often look for is that slow and steady accumulation of capital. And those returns, it’s been a pretty consistent low double-digit return — 11% or 12%. Nothing, ‘oh my goodness.’ But when you compare it to other mainstream asset classes, that long-term return profile is quite similar.

What’s even more fascinating is the consistency of those returns. You don’t have big, huge up years and huge down years that you have in so many other mainstream asset classes. So the consistency of the returns and that relative lack of volatility means that the farmland Sharpe ratio can be very, very attractive — the risk-adjusted returns there. In addition, there are a number of important themes. One is that it can be linked to inflation. It has even been shown to be more inflation-linked than gold, as it tends to outperform in times of high inflation or sustained inflation. And also that it just doesn’t have much correlation to other asset classes. It is almost exactly zero in its correlation to the S&P.

Q: I’m curious about the risk management or potential downside of this type of investment.

A: We tend to think of the world broadly as opco and propco. Your operating company is the agricultural company. Your real estate company owns the underlying land. And so in that scenario, we seem to be more of the real estate company, while the farmer is the operating company. They often have insurance to help them, often government subsidized insurance. So as tenants and as partners, farmers tend to be very stable over time. And as a result, we’re seeing very low default rates in our vacancy across the ecosystem as an example of that.

There are certainly risks involved. And one of the biggest is just assuming risk — making sure you’re actually buying farmland right. And it’s really hard to do because there’s such a lack of information in our world. So, for example, we have a large data science and engineering group that helps build underlying geospatial analytics and data for us just to help underpin these adoption decisions. And we have a great team building partnerships with farmers and going deal by deal.

Q: How has farmland performed lately and what did prices do during the pandemic?

A: As a general note on valuation, the years before the pandemic – the five or six years before that – we saw relatively subdued valuation. We’ve seen a catch-up on that long run — call it average reversal — in terms of valuation over the past several years. So we’ve seen more significance, we’ll call it double-digit growth versus your typical single-digit underlying asset growth. The rents themselves or the income that comes from the farm have also generally grown during the same period.

Click here to listen to the rest of the interview.

–With help from Stacey Wong.

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