BWealthy people have the kinds of investment options that individual investors can’t even dream of – custom derivatives, private placements, even entire social networks. So, which real estate sector are they flocking to right now with high inflation? Farmland.
Farmland may seem boring, but it is one of the best historical investments to protect inflation. Let’s discuss the billionaires who invest in farmland, the status for that as an investment, and how you can get it, too, with Real Estate Investment Trusts (REITs) Gladstone Land (NASDAQ: LAND) And Agricultural Land Partners (NYSE: FPI).
Shahid Khan started the Flex-n-Jet auto parts company in Urbana, Illinois, but is perhaps best known for being the owner of the Jacksonville Jaguars in the NFL. Recently, a company spokesperson confirmed that one of its entities had purchased 24,000 acres of farmland.
Urbana is located in the agricultural town center of central Illinois, so Kahn should be aware of investing. As of April 2021, Kahn had purchased $84 million in farmland across 10 counties in central Illinois. The purchases began in 2015, and he has likely bought more since April 2021.
The next billionaire is Bill Gates, who, with Melinda Gates, was the largest owner of farmland in the country before their divorce. Gates Investment Management has reportedly purchased more than 269,000 acres of farmland over the past 10 years.
Finally, Jeff Bezos recently got into his farmland buying spree as well. Bezos blew up Gates’ ownership levels earlier this year and now owns 420,000 acres of farmland.
The case for investment in agricultural land
The best case now is that agricultural land is inflationary protection. Agricultural land is leased to farms with the possibility of higher prices. If food prices rise significantly, as they are now, the lessor will share in the windfall.
Of course, all firms with primarily fixed costs hope to see windfall profits as prices rise. What characterizes agricultural land is the elasticity of the demand curve. When food prices go up, people can’t stop eating. In many industries with elastic demand, when prices rise, demand falls. When food prices go up, people will start saving more, but demand shouldn’t fall as much.
Inflation protection is not the only reason to invest in agricultural land. The asset also allows investors to diversify their investment portfolios. The less correlated your various investments are, the more consistent your returns will be over time. According to a white paper by fund manager Nuveen, farmland has yielded consistently positive returns and higher returns than the most popular government bonds during the past four recessions in the United States. Its average volatility is also lower than both US stocks and 10-year Treasuries since 2007. If the stock market crashes, farmland may also take a temporary hit, but it probably won’t end up in the same bear market.
How do you get to farmland
Unlike dedicated derivatives and entire social media networks, there are ways for individuals to invest in farmland. The most popular is Gladstone Land. Gladstone owns more than 110,000 acres of farmland across 164 farms. Its stock is up nearly 70% over the past six months as investors piled in to guard against inflation.
This does not mean that they are of poor value today. The dividend yield is still 1.4%, and it’s trading at just over double book value. Remember that its book value is based on the price you paid for the farmland. According to a recent management presentation, the value of some of that land could rise 162% since 2000.
As food prices continue to rise, Gladstone’s profits will follow, and more investors are likely to buy farmland, driving up the prices of its assets as well. Profits and assets give the company more ability to build its portfolio and continue to grow.
Farmland Partners is another way to learn about farmland. It is a more vertically integrated option. In addition to owning 160,000 acres of farmland, she has recently gotten into the field of farmland management (currently managing another 26,000 acres) and will run farmland auctions and brokerages as well.
Farmland Partners is more exposed to higher food prices on leases like Gladstone, but it is also more exposed to higher food prices (with the land it manages) and higher farmland prices (through its auctions and brokerage business).
It should be noted that none of these real estate funds have been an ideal way to invest in agricultural land so far. Farmland Partners spent years in a legal dispute with a short seller who posted incorrect information. Gladstone Land has had remarkable returns over the past year or so, since inflation fears began to mount, but it has lagged behind the market in the seven years before that.
Both REITs are likely to fail unless there are macroeconomic headwinds (such as rising food prices) to attract investors. It’s also possible that recent events may have given companies the catalyst they needed to move into a new phase of growth.
Diversify, diversify, diversify
If rule #1 for real estate investing is “location, location, location,” then the first rule of investing in general should be “diversify, diversify, diversify.” Farmland offers investors the opportunity to not only protect their portfolios from inflation but potentially protect returns during other market disruptions as well. Billionaires invest in this sector, and if you can handle lagging market returns during bull markets, Gladstone and Farmland Partners can provide bear market protection in your portfolio as well.
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Mike Price has positions at Gladstone Land. Motley Fool has and recommends positions at Farmland Partners and Gladstone Land. Motley Fool has a disclosure policy.
The opinions and opinions expressed here are those of the author and do not necessarily reflect the views and opinions of Nasdaq, Inc.