February 25, 2021

By Joseph Byrum

In these uncertain times, tangible investments provide comfort to the risk averse. Unlike buying shares in a company enjoying a spike in publicity, or taking up more complex instruments like derivatives, land is something you can see, touch, and smell. Real holdings don’t just exist on a computer screen — they can be used.

As we enter the post-COVID-19 era, concrete investments such as farmland in particular make increasing economic sense from an investment standpoint.

Even a casual glance at key financial indicators reveals something isn’t quite right. [1] With the presses running overtime, the Bureau of Engraving and Printing is churning out 10 billion more bills this year, and that’s already up 66 percent over the number of Federal Reserve notes printed in 2020.[2]

The Fed is intentionally flooding the economy with cash to boost the inflation rate above 2 percent,[3] a target the central bank has struggled to hit. Governments have traditionally turned to inflation to reduce the real value of their debt. And, at nearly $28 trillion, U.S. debt is already in nose-bleed territory at 128 percent of GDP. Interest payments alone were $160 billion for the first four months of the fiscal year.[4]

Ancient Roman emperors were big fans of inflation. Over the course of 200 years, the empire’s primary monetary unit, the denarius, went from being produced with a 90 percent silver content to 50 percent, on down to 2.5 percent.[5] A copper coin with a thin veneer of silver simply didn’t hold the same real value. So, inflation was the expected result.

What Roman emperors did over the course of centuries the Fed is doing in a matter of months. If the historical analogy holds, we ought to be facing hyperinflation right now. But we’re not —inflation remains low at 1.4 percent.[6] How is this possible? It’s the impact of technology.

Technology’s deflationary impact
The most prominent example is “Moore’s Law,” a prediction that has governed Intel’s computer processor road map since 1965. It effectively held that computing power would double every two years[7] while prices dropped. Recent technical gremlins have interrupted Intel’s pace, but this isn’t about any one company’s offerings. Devices designed to accelerate artificial intelligence calculations are also offering performance levels that more than double every two years, and powerful AI software tools to make the most of the hardware are being built into freely available, open-source programming packages. So much power has never been available so cheaply.

High school students today have never experienced the time when “long distance calls” were a thing, but their parents will remember being billed by the minute when talking to out-of-state relatives. They waited for the weekend or for the overnight rates to kick in before dialing — until  technology simplified everything.

In 1915, the first transcontinental call was a labor-intensive undertaking, requiring at least five human operators to physically patch together the circuits used for the conversation.[8] Thanks to improved switching technology, costs plunged over time. By 1981, a three-minute call on a Monday afternoon cost $4.35 — that’s the equivalent of $13 in 2020 dollars.[9] Each additional minute was just 46 cents (or, $1.38).

Today, phone calls are nothing more than data passing over an Internet connection. Carriers simply can’t charge for them because apps like Skype and Zoom provide the same functionality for free. 

Technology creates flexibility and makes businesses more productive, reducing costs. This downward pressure comes into conflict with the Fed’s inflationary moves. Because both of these pressures are unlike any before seen in history, it creates uncertainty.

How to make the most of these uncertain times
When investors don’t know how things will turn out, their first refuge might be the tried-and-true 60/40 asset allocation that hedges risk through diversification. After all, that’s what works in the usual business cycle dips. But what we’re seeing right now has nothing to do with the typical business cycle.

The problem with allocating assets to hedge against risk is that it’s difficult to predict risks with any certainty. COVID-19 certainly demonstrated the folly of thinking you know what’s coming. 

A viable plan of action needs to embrace the reality that we are in an over-leveraged, deflationary economy. It would form after closely watching movements in debt, deflation, and interest rates while seeking out new ways to diversify outside the comfort zone of stocks and bonds. Great choices include alternative assets like infrastructure, private equity for real assets, and private debt.

As already mentioned, items with intrinsic use and value are good bets while public policy makers struggle to deal with historic levels of debt and unpredictable currency values. Many like Elon Musk have suggested making the jump to cryptocurrency, which could pay off, but this form of investment involves rather unique risks of its own. Ask the San Francisco programmer who forgot the password to his Bitcoin wallet, which is filled with $220 million.[10] Or, even worse, millions can be stolen through digital heists.[11]

Farmland is more stable than even gold as a store of value, and it’s much harder to steal. Aside from a dip in the 1980s, farm values have climbed steadily in nominal terms,[12] only taking brief pauses in 2009 and 2016. In inflation-adjusted terms, farmland is currently down 1.3 percent on a five-year average at $3,160 per acre. That makes it a relative bargain. 

What farmland has that, say, you wouldn’t get buying condos in Florida, is U.S. government assistance in hard times. In 2019, the USDA sent farmers $24.5 billion in various forms of direct aid, insurance, loans, and subsidies,[13] a figure that rose to $46 billion during the pandemic. On top of this, the federal ethanol mandate will rise to 36 billion gallons next year, increasing demand for cropland suitable for corn. When the ethanol mandate first began constraining the land supply, prices for corn and other crops quadrupled.[14] Under the Biden administration, even more emphasis will be placed on the regenerative value of agriculture, with farmland acting as a sink for greenhouse gases.

Farmland as a store of long-term value
Even without the government’s risk mitigation, farmland’s utility will never go away. The same can’t be said for other industries. As the bluest of the blue chip stocks, AT&T was a rock-solid investment because, for most of the 20th century, you had no choice but to pay Ma Bell if you wanted to communicate. That has changed. Wireless alternatives have made landlines all but obsolete.

AT&T remains at the top of the Fortune 500 because it diversified by buying up legacy media companies, satellite television and internet services — offerings now facing stiff, technology-fueled competition that mean AT&T’s position is no longer guaranteed as it once was.

By contrast, the rapidly growing global population guarantees strong demand for crops for the foreseeable future. The United Nations estimates the world population will hit 9.7 billion by 2050 and 11.2 billion by 2100.[15] The Census Bureau thinks the U.S. population will be 400-458 million by 2050.[16] That’s 20 to 40 percent growth in customers without even needing to turn to opportunities overseas.

For most successful businesses, it tends to be just a matter of time before they are rendered obsolete by technology. In agriculture, technology is precisely what makes farm investment a safer bet. There’s a finite supply of arable land, so agricultural research and development has to focus on making the limited supply of land more productive. The latest seed technology, crop protection chemicals, and artificial intelligence farm management systems share the same goal of increasing yields per acre. Technology increases the farm’s profitability over time, ensuring the land’s status as a long-term store of value.

Will other investments see greater return than farmland in the next 20 years? Probably. But in these troubled times, it’s hard to know what those might be. Given the risk profile of today’s economy, a safe bet is the best bet.

Citations:
[1] https://fred.stlouisfed.org/series/M1    https://fred.stlouisfed.org/series/M2
[2] https://www.federalreserve.gov/paymentsystems/coin_currency_orders.htm
[3] https://www.federalreserve.gov/faqs/economy_14400.htm
[4] https://www.treasurydirect.gov/govt/reports/ir/ir_expense.htm
[5] https://www.forumancientcoins.com/numiswiki/view.asp?key=antoninianus
[6] https://www.bls.gov/cpi/
https://fred.stlouisfed.org/series/BPCCRO1Q156NBEA
[7] https://mlperf.org/training-results-0-7
[8] https://web.archive.org/web/20141018165510/http://www.corp.att.com/history/nethistory/transcontinental.html
[9] https://www.fcc.gov/file/11642/download  see page 196
[10] https://www.nytimes.com/2021/01/12/technology/bitcoin-passwords-wallets-fortunes.html
[11] https://techcrunch.com/2020/11/18/cryptocurrency-exchange-liquid-confirms-hack/
[12] https://www.ers.usda.gov/topics/farm-economy/land-use-land-value-tenure/farmland-value/
[13] https://www.gao.gov/key_issues/farm_programs/issue_summary
[14] https://www.nber.org/digest/aug10/agricultural-commodities-and-us-ethanol-mandate
[15] https://www.un.org/en/sections/issues-depth/population/
[16] https://www.census.gov/library/working-papers/2009/demo/us-pop-proj-2000-2050.html

About the Author:

Joseph Byrum holds a Ph.D. in quantitative genetics  and an MBA from the University of Michigan. He has held executive positions in both agriculture and finance.

All views, data, opinions and declarations expressed are solely those of the author(s) and not of Global AgInvesting, GAI News, GAI Gazette, or parent company HighQuest Group