Government bonds, corporate bonds, high yield debt, REITS, dividend stocks...cotton and corn? In today’s stubbornly low interest rate environment, achieving strong risk-adjusted returns without allocating a significant portion of your investment portfolio to public equities is challenging. Retail investors have to be creative.
Institutional investors, on the other hand, have the resources to manage risk adjusted return targets through access to alternative investments in inflation sensitive assets, private equity, venture capital, and hedge funds. However, these institutions are pulling money out of hedge funds at a record pace and deploying the capital in private investment opportunities with significant yield potential and reasonable volatility. In fact, hedge funds saw their worst rate of withdrawals in the first quarter of 2016 since the financial crisis in 2009.1 Underperformance at uncomfortable levels of volatility and seemingly unjustifiable fee structures are causing big-name investors to reallocate funds. So where is the so-called “smart” money going? Farmland—and retail investors are taking note.
There are 12.4 million households that qualify as accredited investors in the United States wondering where they can find alternative sources of yield, at a reasonable valuation, while still contributing meaningful risk adjusted returns.2 High-yielding private investment opportunities can be an effective way to put capital to work. While accessing the latest Cerberus or Apollo fund may not be an option at $5 million+ minimums, opportunities to invest in real estate projects, oil and gas partnerships, and other yield producing assets abound. Farmland is becoming an increasingly popular option for investors and for obvious reasons:
- Investing in agricultural related assets is supported by long-term demographic trends. A finite amount of arable land, limited water resources, and a rapidly growing global population are putting upward pressure on food prices.3
- Investors can capture both land price appreciation and yield from the sale of crops at each harvest.
- Farmland’s portfolio diversification potential is strong with negative correlations to most equity and bond indices.4
- Farmland and crop yields are meaningful inflation protection with one of the highest correlations to the CPI among investable assets.5
- Historical returns have been impressive. Although this should not be an indicator of future results, farmland has consistently delivered for investors; and, at a lower level of volatility.6
- Many states offer tax breaks on land zoned for agricultural use and special incentives are available for investment in equipment and associated depreciation.
- Owning a piece of a farm and getting cash dividends on the sale of crops like soy, cotton, corn, or even pistachios is, well, pretty darn cool.
The chart below displays how the NACREIF U.S. Farmland Index has stacked up against global equities on a three, five, and ten-year annualized basis. It’s important to note that nearly half of the total return historically has come from the crop yield and not the land price appreciation.7
A recent study by the University of Illinois’ TIAA-CREF Center for Farmland Research estimates that the global farmland investment opportunity represents $2.5 trillion. To date, the center estimates that less than 1% is owned by institutions.8 Meanwhile billions of dollars in pension funds, endowment funds, and insurance portfolios are buying up baskets of crops on an annual basis. Professional farmers and agronomists are aggregating farmland for the purpose of selling interests in a portfolio of crops to sophisticated investors. Issuers of private farmland offerings should consider reaching a broader accredited investor network through a 506c, generally solicited, private placement. WealthForge is a leader in administration of Reg D 506c offerings and has processed more than 5,200 individual investments through its online platform. The WealthForge Network can connect these unique agriculture investment opportunities to other RIAs and broker-dealers looking to deploy investor capital into the space.
It’s no secret that the bond market has been in a thirty-year bull market. Yields have steadily fallen since 1983 and inflation adjusted yields in the United States are essentially zero. In Germany, negative interest rates mean that Bund-holders actually pay the government to hold their money. Earlier this month, the 10-year treasury note fell to 1.37% as the continued flight to safety from international risk assets picks up pace. Investment grade and junk bond yields are near all-time lows and valuations in the space are approaching historically high levels. Yield-starved investors looking for a public market solution are running out of options. Today, a handful of Farmland REITs exist: Gladstone Land Corp. (LAND), which IPO'd in 2013, Farmland Partners Inc. (FPI), which IPO'd in 2014, and American Farmland Co. (AFCO), which IPO'd in 2015.9 Each have their own unique styles and basket of crops, but all have underperformed the broader farmland market. Excess correlation to the broader commodities market and daily price fluctuation on low trading volume represent risks that private market opportunities mitigate.
Accessing private placements online is a growing trend for accredited investors. Dedicated allocations to alternative assets like farmland are gaining acceptance by many RIAs and family offices. WealthForge remains interested in the space and our platform for private investments can help accelerate this exciting trend.
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7 NACREIF, Morningstar.com, https://www.ncreif.org/farmland-returns.aspx
Securities offered through WealthForge Securities, LLC. Member FINRA/SIPC. This post is an industry update from WealthForge. The message does not constitute a research report or recommendation and does not take into account the specific investment objectives, financial situation or particular needs of the recipient. This message is not an offer to sell or the solicitation of an offer to buy any security or interest in any fund, which only can be made through a private placement memorandum that contains important information about the risks, fees and expenses of a fund.
Disclaimer: WealthForge provides this information to our clients and other friends for educational purposes only. It should not be construed or relied upon as legal advice.