- Farmland has shown historical resilience through multiple economic cycles and markets disruptions for decades, and demand for agricultural products is expected to expand along with population and income growth.
- Continued advancements in technology and sustainable farm management practices are increasing efficiencies, reducing inputs and costs, and limiting waste.
- As the nascent market for natural climate solutions continues to develop and the potential benefits of biodiversity and carbon sequestration in soil are realized, Manulife Investment Management expects them to become a measurable and accretive part of farmland value.
The solid fundamentals supporting farmland and the potential benefits from investing in the agriculture asset class have been put to the test during the challenging global economic environment experienced over the last few years. As a key provider of basic human needs, including food, feed and fiber, agricultural investments have demonstrated their resilience to economic disruptions during this time while also offering diversification benefits and the potential to hedge against inflation.
Investment in sustainable agriculture has historically offered attractive returns, relatively low volatility and diversification benefits as a private markets strategy within an institutional portfolio, given the low to negative historical correlations of farmland returns with returns of publicly-traded assets such as equities and fixed income. These investment characteristics have spurred increased interest from institutional investors seeking real asset investments as an alternative asset class, and they should continue to support the case for investing in agriculture in the coming decades. Looking ahead, Manulife Investment Management sees growing demand and interest in nature-positive investments and natural climate solutions as an evolving tailwind for agriculture, as investor awareness of the long track record of sustainable management of institutionally-owned farmland and its potential for soil carbon sequestration increases.
So, what are the current drivers supporting the asset class?
Agriculture investment demonstrates resilience during economic uncertainty
Farmland and farm products are integral to meeting basic human needs for food, feed, and fiber. In today’s global agricultural industry, major producing regions stand to benefit as global population growth, rising income and changing diets in developing countries significantly increase the demand for agricultural commodities and higher-value farm products. These underlying market fundamentals have supported the historical resilience that farmland investment performance has shown during various economic cycles and periods of economic disruption.
Major U.S. crop prices remain elevated
Commodity crop prices ($/bushel)
Source: USDA Agricultural Statistics Service, May 2023.
In today’s challenging and uncertain economic environment, the stable cash flows, resilient demand, and potential inflation-hedging capabilities of the asset class have been put to the test. While two years alone are not indicative of a trend, the strong price gains for commodity row crop prices and subsequent positive inflation-adjusted returns witnessed by the asset class in 2021-2022 offer additional evidence of farmland’s stable returns and potential inflation-hedging capabilities in an uncertain and inflationary economic environment.
Farmland generated stable and positive returns in the recent high-inflation rate environment
Nominal annual total returns for select asset classes in 2021 and 2022 (%)
Farmland has historically been regarded as a suitable inflation hedge, despite its marginal aggregate correlation over the last three decades. However, when separated into specific economic periods, the inflation-hedging potential of farmland investments becomes more readily apparent, with returns improving in periods of rising inflation (positive correlation in 1991-1999, 2000-2008, 2016-2022) and remaining positive in periods of limited inflation (negative correlation in 2009-2015). In addition to potential inflation-hedging characteristics, farmland can play a role in improving the overall performance of a mixed-asset portfolio through diversification, due to its low correlation with traditional financial assets.
Farmland returns have positively correlated with inflation in most historic periods
Correlation between the NCREIF Farmland Property Index and CPI inflation by period
As central banks embark on the exceptionally challenging task of trying to temper historically high inflation without pushing economies into recession, the economic backdrop presents both challenges and opportunities for the agriculture sector. Growth opportunities from robust underlying demand fundamentals, a diversified global supply chain, potential inflation-hedging capability, and limited leverage should allow the sector to overcome these near-term challenges. Despite some near-term supply-side issues, including rising input costs, adverse weather, and climate conditions, along with geopolitical tensions disrupting global supply chains, the longer-term trend of worldwide population growth and rising incomes should drive continued demand for agricultural products against a backdrop of a limited supply of arable land. These factors are expected to help maintain a tight overall market demand-supply balance and support and extend the relatively stable historical return performance of the asset class, allowing it to remain a potentially attractive option for investors during the current risk-off environment.
Beyond fundamentals: innovation helps farmers meet today's challenges sustainably
To meet the growing demand for agricultural products, the sector relies on continued innovation to achieve greater efficiency with the use of scarce inputs, reducing the sector's carbon footprint, and minimizing waste.
Corn production yields increase sharply with the application of precision agriculture in 1997–2010
USDA corn yield (bushels/acre/year) and precision agriculture adoption rates
The relatively consistent crop yield growth of the past two decades is evidence of this continuous innovation and due partly to the application of improved genetics and the development of drought-tolerant varieties, along with the increased implementation of precision agriculture. Moving forward, continued increases in the adoption of precision agricultural techniques and the refinement of those techniques through further technological advances will drive improvements in efficiency and sustainability in agricultural production. Advancements in genetics have the potential to add increased resilience to the financial health of farm operators and contribute to the solution of regional food insecurity issues, while precision agriculture technologies seek to improve agriculture's environmental profile through more efficient and cost-effective use of resources.
Agriculture investment, natural climate solutions, and sustainability
As a real asset, agriculture investment is valued for providing diversification benefits, inflation protection, and historically strong returns. But awareness of its potential to become part of the solution to some of our most urgent global challenges through the provision of low-cost, natural climate solutions is increasing. Farmland can act as a significant carbon sink—soils contain about 75% of the carbon stored on land, more than three times the amount contained in plants and animals—and proactive management could enable additional carbon sequestration. As carbon measurement practices continue to evolve and more investors and companies begin to explicitly value carbon sequestration, soil carbon sequestration has the potential to become a more valuable attribute of agriculture investment and create potential return upside..
Market structures are developing that allow the creation, accounting, verification, marketing, sale, and transfer of agricultural carbon credits. The development of robust markets for farmland-based carbon credits will directly connect organizations seeking natural climate solutions with the mitigation opportunities inherent in farming. Creating access to this new tranche of climate solution capital for farmland could help incentivize farmers to accelerate the shift to climate-positive operations and regenerative agricultural practices, potentially creating new revenue streams.
The limited scale of today’s carbon programs highlights the opportunity for significant growth. Agricultural land and operations implementing change management practices that sequester carbon and reduce greenhouse gas emissions have the potential to unlock a new tier of demand for farmland and create additional value while helping to combat global climate change.
Carbon credit markets create new revenue streams
The carbon credit chain in agriculture
The rising importance of sustainability and development of nature-positive capital investment strategies should further bolster interest in farmland investment. Nature loss is consistently identified by business leaders as one of the top risks to the global economy and there's increasing recognition of the dual crisis of nature loss and climate change. Again, sustainable agricultural investment stands at the forefront of available and viable solutions: Sustainable farming can restore nutrient deficiencies, reduce pest and disease vulnerability, and increase soils’ water-holding capacity. Sustainable agriculture also includes social benefits as it can also provide rural employment opportunities, recreational open spaces, and help maintain clean water resources.
An opportunity to leverage sound fundamentals, support basic human needs, and invest sustainably
Agriculture remains a strong real asset investment opportunity. When investments are diversified across commodity types, geographies, and management approaches, and included in a larger investment portfolio, agriculture investment has demonstrated its ability to offer attractive returns that are generally uncorrelated with returns to other financial assets. In addition to its role as a solid and reliable performer with positive attributes for institutional investors, agriculture is uniquely positioned to respond to the expanding needs for food, feed, and fiber of a growing population with rising income, while also offering an opportunity to help address some of our most profound social and environmental challenges.
Index definitions: National Council of Real Estate Investment Fiduciaries (NCREIF) Farmland Index tracks the performance of farmland properties held by NCREIF members. The NCREIF Timberland Index tracks the performance of farmland properties held by NCREIF members. The S&P 500 Index tracks the performance of 500 of the largest publicly traded companies in the United States. The MSCI Europe, Australasia, and Far East (EAFE) Large Cap Index tracks the performance of publicly traded large-cap stocks of companies in those regions. The MSCI Europe, Australasia, and Far East (EAFE) Mid Cap Index tracks the performance of publicly traded mid-cap stocks of companies in those regions. Ibbotson Associates (IA) Stocks, Bonds, Bills, and Inflation (SSBI®) U.S. Long-Term Government Bond Index measures the performance of a single issue of outstanding U.S. Treasury bond with a maturity term of around 21½ years. Ibbotson Associates (IA) Stocks, Bonds, Bills, and Inflation (SSBI®) U.S. Long-Term Corporate Bond Index measures the performance of US dollar-denominated bonds issued in the US investment-grade bond market including US and non-US corporate securities that have at least ten years to maturity and a credit rating of AAA/AA. The Consumer Price Index (CPI) tracks the average change of prices over time by urban consumers for a market basket of goods and services. It is not possible to invest directly in an index.
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