The loss of purchasing power as a result of inflation is possibly the most noticeable element of rising prices for individuals. In anticipation of these rises, wise investors look for measures to protect themselves from inflation.
Investing in an asset that is predicted to sustain or increase in value during an inflationary time is known as an inflation hedge. Hopefully, it will appreciate faster than, or at least on level with, inflation. Rent and property values tend to rise with inflation, hence real estate has long been thought to be a good inflation hedge. Real estate and farms have been shown to be excellent inflation hedges in the past.
I compared inflation to the new home price index and farmland values from 2000 to 2020 to see how effective real estate and farmland have historically been as investment hedges in Canada.
Because it is the most timely indicator of changes in residential real estate values, I chose the new home price index as a proxy for property appreciation. The appreciation was calculated using farmland values received from Farm Credit Canada.
The cumulative inflation change from 2000 to 2020 was 39%, compared to a change and growth of 51.8 percent in the new house price index. The new price housing index tracked above inflation, according to the data.
Between 2000 and 2020, the value of farmland increased by 168.4 percent. According to the data, Canadian farmland has surpassed inflation by a wide margin.
Residential real estate and farmland values both increased faster than inflation over this 20-year period, implying that both were effective inflation hedges.
Can Land outperform inflation?
Real Estate Profits With inflation, real estate works wonderfully. This is due to the fact that as inflation rises, property prices rise as well, lowering the amount a landlord may demand for rent. As a result, the landlord will be able to collect a bigger rental revenue over time. This allows you to keep up with the rising cost of living.
Is farmland a good inflation hedge?
Farmland is a typical inflation hedge since it has a positive association with inflation. In fact, many investors consider farmland to be a better investment than other hard assets like gold because it generates positive cash flow while protecting against inflation. The United States is the world’s largest debtor, and governments have a natural tendency to inflate, whether intentionally or as an unintended consequence of well-intentioned policy.
What are some excellent inflation hedges?
ETFs and mutual funds are two of the most straightforward ways to diversify investments into international markets. When compared to acquiring a portfolio of American Depositary Receipts (ADRs) or foreign stocks, these funds are a low-cost method to invest. If you’re already invested in S&P 500 index funds, you might want to diversify your holdings with an international index fund.
Is real estate a good inflation hedge?
Because real estate has low correlation with equities and bonds, it is thought to be a good way to hedge against inflation. As a result, investor interest is skyrocketing despite a scorching real estate market, a scarcity of homes, and the possibility of rising mortgage rates.
Is real estate an effective inflation hedge?
During periods of high inflation, real estate has performed well. It is well known that real estate can be used to hedge against inflation, at least in part. For one thing, in better economic times, landlords have the option to raise rents, which boosts property value.
Is Bill Gates investing in farmland?
Farmland was not on many investors’ radars as an investable asset class until earlier this year, when it was discovered that Bill and Melinda Gates were the largest owners of US farmland.
Many speculated about Gates’ motivation for the acquisitions, wondering if they were part of a bigger sustainability strategy. In fact, Gates claims that these investments have nothing to do with climate change. Even the most astute investors might have been stunned by this. However, those who are familiar with farmland will understand why this asset class is so appealing to investors.
Institutional investors are hungry for farmland
Farmland was not a popular asset type among financial investors for many years. Even after alternative investments became popular, few funds paid attention to them. Several roadblocks remained in the way, including a highly fragmented market in which most farmland was owned by families; and a scarcity of investment experts who knew how to assess farmland investments.
The tide started to turn in the early 2000s, when institutional investors began to take a closer look at farming. During the Great Financial Crisis of 2008-2009, when investors were looking for alternatives to traditional safe haven investments like bonds and gold, momentum surged. In a short period of time, there was a surge in the number of funds dedicated to farmland investment. In 2020, there will be 166 such funds around the world, up from only 19 in 2005.
Through its asset management arm, Nuveen, the Teachers Insurance and Annuity Association of America-College Retirement Equities Fund, for example, has $1.2 trillion in farmland holdings.
This trend can be seen in Bill Gates’ investments in farms. For almost a decade, the Gates have been surreptitiously accumulating acreage through their investment manager, Cascade Investment. The firm was already a substantial farmland investor when The Wall Street Journal covered it in 2014, with “at least 100,000 acres of farmland in California, Illinois, Iowa, Louisiana, and other states.”
Cascade has made several other big acreage investments based on that profile. In 2017, they paid $520 million to the Canadian Pension Plan Investment Board (CPPIB) for a farmland portfolio previously owned by the Agricultural Company of America (AgCoA). CPPIB was one of the largest institutional investors in row crop farms in the US when it bought AgCoA’s portfolio in 2013. Another major purchase was Cascade’s $170 million purchase of 14,500 acres of farmland from John Hancock Life Insurance in Washington state in 2018.
Bill Gates now owns 242,000 acres of farmland spread over 19 states. He also owns 25,750 acres of transitional land and 1,234 acres of recreational property, giving him a total of 268,984 acres of land. Louisiana (69,071 acres), Arkansas (47,927 acres), and Arizona (47,927 acres) are his largest holdings (25,750 acres).
Farmland delivers solid returns to investors
Rental and crop payments, as well as appreciation when the underlying asset is sold, have historically provided significant real returns on farmland. The average yearly return on farms was 10.9 percent between 1992 and 2020, compared to 7.87 percent for the stock market and 6% for gold. Aside from that, cropland is a very low-volatility asset class. During the same time period, cropland volatility was 6.84 percent, while stock market volatility was 16.9 percent and gold volatility was 14.8 percent.
Farmland also diversifies a portfolio, which is important for long-term wealth accumulation. Diversification is achieved by investing in a variety of uncorrelated asset classes. Farmland is uncorrelated with other main asset classes such as equities, bonds, and gold, which means it is unaffected by price fluctuations in other assets. For example, between Q4 2019 and Q1 2020, the stock market dropped 19.8% due to the Covid-19 epidemic. Farmland, on the other hand, fell by 0.1 percent, marking only the second negative quarter since 1992.
Farmland is a sustainable asset class
Despite the fact that one of the primary focal areas for his nonprofit Gates Foundation is sustainable agricultural development, the Microsoft co-founder claims that his farmland investments are unrelated to climate change. While Gates may be only concerned with profits, agricultural investing has the potential to drive sustainability on a large scale.
Bill and Melinda Gates have the ability to build the world’s largest agrifoodtech testbed, but they must first win over farmers. More information can be found here.
Farmers will need high-tech and sustainable ways to meet the agricultural needs of the twenty-first century, as well as the world’s growing population, in the face of a changing climate and increasingly restricted resources. Organic or nature-based farming methods, water conservation, and other agronomic innovations to boost agricultural efficiency are among the sustainable and productivity-enhancing developments. Despite the growing popularity of these technologies, many of the transitions are prohibitively expensive for farmers.
Investments play a critical role in this area. Farmland investors are supporting much-needed capital renovations and boosting the long-term viability of farms by injecting funds.
Furthermore, sustainably maintained farmland will increase the value of the property over time. Farms with good soils, plenty of water, and well-designed infrastructure are more valuable, and this will be even more true in the future as high-quality farmland becomes more scarce.
You no longer need Gates levels of wealth to reap the benefits of farmland
Due to significant hurdles to entry, such as opaque markets and large minimum investments, farmland investing has been restricted to a few institutional investors and ultra-high net worth individuals like the Gates’ for far too long. This is, thankfully, no longer the case.
For example, crowdfunding investment platforms allow accredited investors to acquire a piece of farmland for as little as $15,000. These platforms remove many of the hurdles to investing in farms and provide access to a variety of investment options, including apples, nuts, and citrus.
Farmland can also be purchased through real estate investment trusts (REITs) such as Farmland Partners or agricultural commodity exchange-traded funds (ETFs). While these funds provide investors with some of the advantages of farmland, they are ultimately dependent on the stock market and its volatile swings.
The reasons for Gates’ farming investments could be numerous. Farmland may play a substantial part in any portfolio, thanks to its critical position in the global food supply and its historically high financial performance. It’s now easier than ever to invest, even if you’re not one of the world’s wealthiest men.
Is agricultural land a wise investment in 2022?
- Mitigation and conservation easements that may limit the property’s ability to be developed in the future
There are also continuing expenses to consider, such as land maintenance and property taxes.
Land demand is increasing at rates we haven’t seen in a long time; but, price appreciation isn’t even close to that of residential housing, which has climbed by 18.1 percent in the last year. Land can be viewed as a long-term speculative investment that, if chosen correctly and with adequate due investigation, can pay off handsomely over time.
Those who don’t want to risk their money on individual lots might want to explore investing in a real estate investment trust (REIT) that owns, manages, or invests in land. Gladstone Land or Farmland Partners, for example, are two farmland REITs to consider. Land investment could be a sensible choice in 2022, but it will take careful analysis and due investigation before making a purchase.
Is agricultural land a wise investment in 2020?
If you’re reading this, advertising for Acretrader will soon appear in your Instagram feed, inviting you to “unlock the long-term wealth potential” of a unique type of investment: farmland.
You’d be among the well-heeled. Bill Gates is now the largest landowner in the United States, and other billionaires, global firms, and pension funds are progressively buying up fertile acres, according to newspapers such as The New York Times and Business Insider.
The logic is simple: farmland is a smart investment since it is a scarce resource (there is only so much land in the United States, and the amount of undeveloped acres continues to diminish) and in high demand, given the importance of food production. Its value has consistently climbed over the last several decades, and many consider it “inflation-proof.” “Land is one of the oldest investment classes in existence, yielding huge wealth over centuries,” claims Acretrader on its website.
How will you protect yourself from inflation in 2022?
During the epidemic, there was a surge in demand for products and labor, resulting in the fastest rate of consumer price and wage inflation since the early 1990s. As the pandemic passes and spending moves toward services rather than products, we believe inflation will reduce due to greater labor supply. In the end, it should not jeopardize our base case scenario, which predicts a significantly more vibrant cycle in the 2020s than we experienced in the 2010s.
However, both prices and salaries are expected to rise at a pretty rapid pace. We believe there are three ways for investors to navigate this climate.
Look to real estate for inflation protection
Because leases are regularly reset higher, real estate investors often profit from a natural inflation hedge. Furthermore, we believe the residential and industrial real estate sectors will benefit from strong structural tailwinds. Following the global financial crisis, chronic underbuilding (compared to trend) resulted in a housing shortage in the United States. Workers’ labor is in high demand, and earnings are rising, ensuring that housing remains cheap even as home prices rise. Migration enabled by remote work is also offering opportunities.
The global trend toward e-commerce will demand additional warehouses, storage, and logistics in the industrial sector. The need for further investment is highlighted by problems in the global supply chain that became apparent in 2021. We’re also seeing an increase in demand for life science research facilities. While we prefer to invest in real estate through private markets, publicly traded real estate investment trusts (REITs) have outperformed other equities sectors during periods of rising inflation. In a nutshell, real estate is our favourite option to invest in a higher-inflation climate.
Rely on equities, especially cyclical ones, to drive capital appreciation.
While economists dispute the complexities of inflation, the fundamental principles underlying the current phase appear to be clear: Strong demand and economic growth are driving inflation. Because corporate earnings are also good in inflationary settings, equities tend to do well. We anticipate that stocks of companies that are more closely linked to economic activity and interest rates will likely outperform. Bank stock valuations, for example, have generally been linked to inflation forecasts. In cyclical industries like industrials and commodities, companies with pricing power could see strong revenue increases. Stocks that do well when growth and inflation are rare (think the digital economy) may, on the other hand, be at more risk. In our opinion, you should maintain a fair balance between the two categories, and expect a hard environment for fixed income portfolios as interest rates climb.
Avoid excess cash, and consider borrowing.
In our Long-Term Capital Market Assumptions, 80 percent of the assets we consider have a higher predicted return than inflation. Investing surplus cash in a portfolio that meets your goals and time horizon is the simplest approach to protect purchasing power. Borrowing may be prudent in the current situation. Interest rates remain low, particularly when compared to inflation. A mortgage is a straightforward approach to profit from a healthy home market. If the Federal Reserve reacts to rising inflation by boosting interest rates, borrowing expenses may become less appealing.
Key takeaways
Higher inflation is likely to persist through 2022, but it does not have to be a reason for alarm. Investors can create a portfolio that considers inflation risks and attempts to manage them. While excess cash appears unappealing, relying on equities rather than fixed income and focusing on cyclical sectors and real estate could prove to be profitable strategies. Meanwhile, while policy interest rates are still low, borrowing and settling existing liabilities may be prudent.
In the context of your individual circumstances and aspirations, your J.P. Morgan team can provide you with more information on how the present environment is influencing risk and return possibilities.
How will you protect yourself against inflation in 2021?
If rising inflation persists, it will almost certainly lead to higher interest rates, therefore investors should think about how to effectively position their portfolios if this happens. Despite enormous budget deficits and cheap interest rates, the economy spent much of the 2010s without high sustained inflation.
If you expect inflation to continue, it may be a good time to borrow, as long as you can avoid being directly exposed to it. What is the explanation for this? You’re effectively repaying your loan with cheaper dollars in the future if you borrow at a fixed interest rate. It gets even better if you use certain types of debt to invest in assets like real estate that are anticipated to appreciate over time.
Here are some of the best inflation hedges you may use to reduce the impact of inflation.
TIPS
TIPS, or Treasury inflation-protected securities, are a good strategy to preserve your government bond investment if inflation is expected to accelerate. TIPS are U.S. government bonds that are indexed to inflation, which means that if inflation rises (or falls), so will the effective interest rate paid on them.
TIPS bonds are issued in maturities of 5, 10, and 30 years and pay interest every six months. They’re considered one of the safest investments in the world because they’re backed by the US federal government (just like other government debt).
Floating-rate bonds
Bonds typically have a fixed payment for the duration of the bond, making them vulnerable to inflation on the broad side. A floating rate bond, on the other hand, can help to reduce this effect by increasing the dividend in response to increases in interest rates induced by rising inflation.
ETFs or mutual funds, which often possess a diverse range of such bonds, are one way to purchase them. You’ll gain some diversity in addition to inflation protection, which means your portfolio may benefit from lower risk.