Economic uncertainty is an everyday part of investing. While it may surprise the general public, investors and savvy financiers know that markets won’t be stable forever. In fact, it would be bad if they did.
Investors diversify their portfolios and look for stable markets to mitigate the risk of financial instability and collapse. If you’re good at what you do, the hit your pocket book takes from a financial downturn won’t be too bad.
Depending on your age, you’ve seen a few economic downturns in your lifetime, whether it be the Black Monday Market Crash in 1987 or the Global Recession of 2008. Unfortunately, here we are again. COVID-19 has thrown markets into flux. Joblessness is rampant, small businesses are struggling, and corporations that were once stable investing opportunities are now drowning.
Savvy investors do what they can to plan for crises like these. But, we can’t predict the future. That being said, many investors look for “recession proof” stocks that won’t reduce in value when a crisis strikes. Some even find funds that grow in value while others diminish.
As many are learning, farmland is that type of investment. For the uninitiated, we’re going to give you some insight into why you should invest in times of crisis, and why farmland specifically is the way to go.
Many people (even some investors) like to sit tight during a recession or economic downturn. Their 401ks are dwindling, savings are diminishing, but changing the course may lead to even more losses. At least, that’s the thought process.
In fact, being dynamic and active during a recession can ensure you come out on the other side with more money, and a more solid portfolio.
However, the key is to invest wisely, and not just based on low stock prices.
It’s not a given that every stock will ever regain their value. Take airlines as an example: everyone needs to fly, which is why investing in Boeing or Delta always seems like a stable place to put your money. However, given what we’ve learned from Blackrock’s yearly memo and the buying patterns of millennials and Gen Zs, airlines in their current form may depreciate in value in the long term.
In short, investing during a recession is a good thing. But, be smart about your strategy by taking the future into account. The stock price may be unbelievably low now, but no one knows what the future holds.
This is part of the reason why farmland is such a good investment opportunity during an economic downturn.
1. Land is cheaper
During a recession, real estate and property values generally take a hit. The value of homes decreases, which usually means a pretty big windfall for the real estate market when markets begin to stabilize.
In terms of farmland, a similar phenomenon takes place. According to a survey conducted by the USDA, after the 2008 financial crisis, “farmland prices and cash rental rates reported a wide range, from no drop to an 11% decline based on regional dynamics.”
But, you may be saying, we were warned not to buy into stocks just because the price was low. What makes farmland any different? The answer: favorable diversity and stability.
2. Favorable Diversity
We cover this topic more deeply in our “5 Benefits of Investing in Farmland” piece. But, in brief:
Farmland negatively correlates with other asset classes, and only slightly correlates with real estate. This means that while other assets reduce in value (stocks, bonds, etc.), land prices increase, as do the yields from agricultural projects.
In other words, farmland prices actually tend to increase as other stocks decrease in value. While this may seem to contradict the argument that land is cheaper during a crisis, it is the land itself as a real estate property that decreases in value, while the yield from said farmland increases in value. From the same USDA survey, “combined values of farmland and improvements increased 8.1% across the nation.”
On top of that, farmland yields are often drivers of inflation. As economies come out of a recession and buying power increases, governments will increase inflation to even the score. As crop yields are directly tied to rises in inflation, farmland investors actually gain from this increase in the long term.
This is part of the reason why farmland is considered such a stable investment opportunity.
Rain or shine, recession or golden age, people need to eat. Crop yields are increasing year over year as populations rise and the middle class grows.
Many investors point to banks and high tech as very stable investments. Banks have been around for hundreds of years and can be counted on as pillars in your investment portfolio. However, many people were put off by that strategy as a result of the 2008 financial crisis. Plus, cryptocurrencies and fintech organizations are sparking conversations around nontraditional, digital, and decentralized banking, which could upend the entire industry.
This is not something that farmland investors need to worry about. Many investments have a “perceived value”, meaning that we, as a society, decide what we’re willing to pay for said services or products. They have no “inherent value”, meaning that we do not base our idea of value on them.
Gold has historically been the standard for determining the value of products and currencies around the world. However, as Robert Frost famously wrote, “nothing gold can stay.”
In its place, farmland and crop yields have taken the reins as the premier inflation hedging investments of our age. This means that as inflation rises, farmland and crop yields rise to meet it, retaining the buying power that it had when the land was first purchased.
Is farmland recession proof?
Unfortunately, nothing is. As we saw in the USA survey, farmland is, well, land. If people have less money to purchase things, therefore decreasing demand, the value of those things inevitably goes down. Farmland is no different.
However, what farmland does offer is a comparably stable investment during a recession. It offers investors and individuals the peace of mind that, once this is all over, they will bounce back. The same can’t be said for many investments—even banks.
Many experts have observed that farmland is a resilient investment, and they aren’t making more of it. Legislators are encouraging farmers and landowners to do more with less as climate change threatens the planet and our ability to yield crops. This means that while everything seems like it’s going down the tubes, the value of your investment can only increase.
The bottom line is that farmland, more so than gold, high tech, and banks, is a solid investment to make during a recession. One that will stabilize your portfolio during the storm, and grow as the skies clear.
FarmTogether: Farmland investing made easy
FarmTogether is a technology enabled farmland investment platform that allows investors direct access to the land they want, when they want.
Our farmland is carefully curated, as we only work with farmers and land that we would personally invest in. And with investment commitments as low as $10,000 and returns as high as 13% with 9% cash yields, we are democratizing the ownership of farmland.
We want you to have more of a say in how land is tended. As corporations seek to take over the country’s farms, we believe that diverse voices will drive us into the future of agriculture and farming. All while making our investors money in the process.
Download our free Farmland Investment 101 White Paper to learn more about farmland as asset class