Investing in gold or bricks has always been considered a good method to protect yourself from inflation, purchasing a “real” asset that maintains its value over time and can be revalued when it is monetized. However, few consider a truly alternative but equally profitable and effective investment: that in agricultural land. Saira Malik, Chief Investment Officer at Nuveen, explains why investing in farmland can be a good way to hedge against inflation.
Farmland less risky and more profitable than gold
Investing in farmland can be an effective way to pursue several portfolio-friendly characteristics, Malik says. Many agricultural commodities, including various foods and other raw materials, are part of the basket of goods used to calculate the consumer price index, perhaps the best-known indicator of inflation.
When the annual inflation rate in the US was above 3%, for example, farmland far outperformed gold, with volatility about a third lower, resulting in better asset-adjusted returns. risk. Specifically, volatility (or, in a very broad sense, the degree of risk, ed) of gold was 6.2 percent against 4.1 percent of agricultural land, while the yield of agricultural land achieved 12.9 percent against 8.3 percent of gold .
Why it is better to invest in agricultural land
As commodity prices rise, so do the revenues and cash returns generated by the agricultural land that produces them. Farmland investors therefore have the opportunity to benefit from a true total return, with a strong income component arising from lease obligations and capital appreciation due to the increase in value of the land over time (in contrast, the gold offers only the potential for price appreciation and does not generate income). Furthermore, agricultural land offers geographical and commodity diversification, given the low correlation between different regions and different types of crops.
Cash leasing, custom farming and food safety: the trends of the future
Furthermore, investments in agricultural land provide access to a number of operational strategies. The cash lease/cash flex, for example, is at the lower end of the risk spectrum, with limited exposure to changes in prices and production. In this strategy, agricultural land is rented on a fixed basis or with a flexible structure in which the owner receives a share of the harvest.
Another approach is the custom farming, where the operator farms at the owner’s discretion, providing all the labor and machinery. The owner assumes the risks and potential rewards of agricultural production with minimal investment in equipment and personnel. Finally, direct cultivation of agricultural land carries the greatest operational risk, as the owner directly manages the property and provides machinery, personnel and raw materials for the crops.
Hundreds of agricultural technology companies are working on revolutionary developments in the field of food safety, next-generation supply chain technologies, productivity, controlled environmental agriculture (such as indoor production to maximize crop yields) and vertical agriculture. With the world’s population expected to increase to 9.7 billion people by 2050, farmers will need to grow 70% more food than today to meet future demand. All these factors underlie an inelastic demand for agricultural land and the resulting investment opportunities.
