“There’s going to be some fortunes made in agriculture, and when an industry breaks full faith, even mediocre people make a lot of money…”[i]
– Jim Rogers, Co-Founder of the Quantum Fund, Austrian Economist and commodity guru.
Well-diversified hard asset investors include farmland in their portfolios for a combination of income generation, diversification and inflation hedging. The asset class has generally caused investors to shy away, unsure of how to tap into the lucrative farming market, short of buying acreage and a tractor themselves.
Jim Rogers says, “If you want to invest in agriculture, the best thing you should do is become a farmer … Alternatively, you can buy land and lease it out if you can find a good farmer.”[ii]
We believe this form of passive farming, via buying farmland and leasing it to highly experienced farmers, is an excellent way to diversify a portfolio, generate current income, and protect against the high prices we see in the current stock market environment. This strategy allows the typical investor to forgo the burden of farm management, keeping the day-to-day responsibilities in the hands of an experienced farmer.
Water & Mineral Rights
In our opinion, farmland is the very best way to play the water investing theme, which has been an important part of our diversified hard asset approach over the past 30 years. According to natural resource investor Rick Rule, water that is produced and consumed as a consequence of agriculture activities is often as much as 90% cheaper than the water that is produced and consumed in industrial, residential and commercial activities. Rule believes this arbitrage opportunity will narrow over time, to the benefit of agricultural holders of water rights. Further, land packages, along with water rights, may include other mineral rights as well, including natural gas, oil and minerals.
California is undergoing a dramatic sea change in how agricultural, industrial and residential users access their water. The implementation of the Sustainable Groundwater Management Act (“SGMA”), signed by Governor Jerry Brown in 2014, is expected to create local open markets to buy and sell water. Indeed, it is already disrupting the usual methods by which agribusiness is managed in California, one of the most productive agricultural regions in the world. We believe this will impact the way investors view California farming and, possibly, the outlook for non-Californian farming regions as well.
Negative Correlation to Stock Market
Historically agricultural investments have benefited from a low or negative correlation with several traditional asset classes. During the last economic downturn, while most other asset classes were sold off, farmland held up. The bar chart illustrates the returns of farmland during the last two major drawdown periods of the broader equities market. During each period, farmland was one of the few asset classes to provide solid positive returns.
As we enter the ninth year of this equities bull market, the risk of an eventual correction only increases.
Perry Vieth, President of Ceres Partner’s $600M farmland portfolio, declares that “turmoil in the broader markets, record low Treasuries and current geopolitical tensions reminds me yet again why we own farmland: I sleep well at night knowing that a substantial portion of my portfolio is invested in farmland and farm-related assets.”
Whitney George, Senior Managing Director and Chairman of Sprott USA, is a dedicated farmland investor with a significant personal investment. George argues that stable long-term appreciation, inflation protection, portfolio diversification, and four years of depressed crop prices have created today’s circumstances and make agricultural investments very attractive. He specifically sees the Eastern Corn Belt region of the United States as an area of interest due to the fragmented market, low competition, and its stable water sources from the Great Lakes Basin.
We view agricultural investments as a great complement to a fully diversified natural resource portfolio and as a hedge against potential drawdowns in the U.S. equities markets.
If you are an Accredited Investor and would like to receive a complimentary whitepaper about specific farmland investments, please contact your Sprott broker, email firstname.lastname@example.org, or reply to this email.
The next article of this series will focus on the economics of farming and farmland investing.
[i] Anthony Wile, Jim Rogers: Choose Farming for Your Family and Finances(The Daily Bell, 2014).
Source: Sprott’s Thoughts by Anthony Bevilaqua