(Bloomberg) – In times of historic inflation, an alternative asset has made its way into portfolios as a means of diversification and a potential hedge against persistent price pressures: farmland.
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“It has actually been shown to be more inflation-linked than gold as it tends to outperform during periods of high inflation or prolonged inflation,” said Carter Malloy, founder of AcreTrader, an Arkansas-based agricultural land investment firm. “And also that there just isn't much correlation to other asset classes. The correlation to the S&P is almost exactly zero.”
Malloy joined the What Goes Up podcast to talk about the business and process of investing in farmland. Here are some highlights of the conversation, abridged and edited for clarity. To listen to the full podcast, click here, or subscribe below on Apple Podcasts, Spotify, or wherever you hear it.
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Q: How does AcreTrader work and who is your investor base?
A: There are accredited investors on the platform – this ranges from people in cities to farmers in rural areas and people living near farms to institutions – family offices etc. That is what most people aim for to find some stability diversification. That's often why we see people taking a genuine interest in farmland — in the slow and steady compounding it can offer investors.
Q: And there's no real connection to risky assets or even government bonds. It is to some extent related to inflation. Talk to us about what you can expect from this yield profile and volatility as an investor in agricultural land.
A: First, it's important to consider what farmland is not. Farmland is not a get-rich-quick scheme. You rarely hear people say, “Oh my god, I doubled my money on my farmland investment this year.” Conversely, you also don't hear people say, “Oh my god, I lost all my money on farmland this year.” What So investors often look for is a slow and steady increase in capital. And those returns have been pretty consistent in the low double digits — 11% or 12%. Nothing, “Oh my god.” But when you compare it to other mainstream asset classes, the long-term return profile is pretty similar.
What's more fascinating is the consistency of these returns. There aren't big, big up years and big down years like there are in so many other mainstream asset classes. So the consistency of returns and the relative absence of volatility means that farmland's Sharpe ratio can be very, very attractive — the risk-adjusted returns there. In addition, there are a few key issues. First, it may be due to inflation. In fact, it has been shown to be more closely linked to inflation than gold, as it tends to outperform during periods of high or persistent inflation. And also that there simply isn't much correlation to other asset classes. The correlation to the S&P is almost exactly zero.
Q: I'm curious about the risk management or potential downsides of this type of investment.
A: We tend to think of the world in general as opco and propco. Your operating company is the farm. Your real estate company owns the underlying property. Therefore, in this scenario, we are more inclined to be the real estate company while the farmer is the operating company. They often have insurance to help them – often government-subsidized insurance as well. Therefore, farmers as tenants and partners are usually very stable over time. As an example of this, we are seeing very low default rates in our vacancy rates across the ecosystem.
There are definitely risks involved. And one of the biggest problems is just hedging the risk – to make sure you're actually buying farmland at a good price. And that's really difficult because there's such a lack of information in our world. For example, we have a large data science and engineering team that helps us create underlying geospatial analytics and data to support these underwriting decisions. And we have a great team that builds partnerships with farmers and looks at every single deal.
Q: How is farmland doing lately and how have prices been during the pandemic?
A: As a general statement of appreciation, in the years leading up to the pandemic – the five or six years before that – we experienced relatively muted appreciation. We've seen some catching-up in terms of long-term appreciation over the last few years – let's call it a mean reversion. So since we've seen more meaningful growth, we're calling it double digits versus the typical single digit growth of the underlying asset. In general, rents themselves and income from agriculture have also increased over the same period.
Click here to hear the rest of the interview.
– With support from Stacey Wong.
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