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The Alternative Answer Daily

Old McDonald Had A … Good Investment

This post appeared originally on Forbes.com.

You’ve heard it a million times: invest in real estate because “they’re not making any more of it.” Often, that’s less than true. Manhattan hasn’t gotten any bigger, but its residential and office capacity has soared. It is more than true, however, for farmland: the number of arable acres per world population has been falling steadily since the 1960s.

Many reasons for investing in farmland are screamingly obvious: it produces current yield with no interest rate risk; generates returns highly uncorrelated to the general financial markets; and protects holders from inflation. That’s why some folks like to call it “gold with a coupon.”

But, are these reasons maybe too obvious? After all, larger institutions have been pouring money in to farmland for years, and per-acre prices have had a tremendous run over the past decade and more. Is too late for average investors to get in?

I don’t think so.

The reason is simple: the fundamentals still work. Properly acquired acreage still maps to a solid 4% yield, appreciation completely aside. That’s what you should expect from a cash lease on a quality property producing corn, wheat, and soybeans–irreplaceable elements of the worlds’ diet. (I’ll pass on handicapping almond and avocado farms). And 4% — without interest rate risk and with inflation protection — looks awfully good right now.

Could land values fall and damage your total returns? Of course. But there are some awfully strong fundamental reasons that support even these recent higher prices. Most basic is the huge, rising, politically empowered middle class of the Middle East, Asia, and Latin America. One thing you can pretty much count on is that better diets will on the top of their agendas. And that means direct demand for grain staples, and also for animal protein, which depends on… those same staples.

Indeed, one credible estimate says that if every person in China suddenly had two eggs a day, it would take the entire Canadian wheat output just to feed those overworked hens.

But there’s another, pretty surprising, reason land values are unlikely to fall significantly, despite the recent run up. And it is: technology. Numerous innovations, from GPS-guided tractors to ever better seed stock to irrigation breakthroughs, are constantly increasing the yield a given acre can produce. To give just one cool example, some farms now plant seeds with gel packs that absorb and hold rainfall (that otherwise would run off or evaporate) until the plant needs it. So even if commodity prices do tumble, the land’s economic yield is protected by enhanced output over time, a spectacular natural hedge.

And, of course, if do we continue to get the underlying appreciation that has fueled much of the +10% total returns of the past many years, so much the better.

(A quick note on political and environmental risk: no, changes in the farm subsidy system– if any– are not likely to change the basic investment thesis here; and yes, crop insurance is a good safeguard against flood and drought).

Now, the bad news. It’s not so easy to invest in farms. Do not think for a moment that investing in agricultural companies, or the ETFs that hold them, is a reasonable substitute. Those might be decent choices too, but they do not represent the same basic investment proposition as owning the land itself. And remember, we’re not “playing” a theme here looking for big gains- – we’re making a solid, yield-oriented, purchase-power-protecting allocation.

So… where to look? There are numerous, high quality, mid-size investment partnerships out there with strong management teams and reasonable investment minimums. And some wealth management firms have excellent internal teams that will handle the property purchase and management for you through a separately managed account. In either case, you can expect to pay modest management fees, but the expertise is likely worth it. Or, you can go directly to one of many farm brokerages (easy to find online) and have at it… but make sure to watch a few episodes of Green Acres first.