published on August 02, 2024 in Celebrated Individual

Farmland Investing for High Yields, Inflation Hedge: Carter Malloy

Yields of 10% to 15% can be found in crypto markets, but often they come with big risks, as the market is largely unregulated.

With low interest rates, investors are going deeper into the dark corners of markets in the hunt for yield.

According to Carter Malloy, the CEO of AcreTrader, they're overlooking a traditional asset class: US farmland.

While farmland might not sound as sexy as crypto or venture capital, the returns are solid. It's also unlikely to face the same regulatory hurdles as the burgeoning crypto asset class could in the next few years.

On average, US farmland has delivered a 12% annualized return for the past 20 years, a 2020 report by the investment manager PGIM found. That's compared with a 6% return offered by stocks, 5% by bonds, and 8% by real estate.

Malloy knows about the benefits of US farmland, having spent years personally investing in it.

When a neighbor asked Malloy how he could gain similar exposure to farmland, Malloy realized how difficult access could be for the average retail investor.

Malloy had unique exposure to both investing and farmland: He was a partner at a hedge fund, and he spent time on a farm growing up.

"There was no real way for most people to invest, and that's why it's not been popularized in financial media — because the only real way to get at it was either to put a million dollars into a private-equity fund or go out and buy a million-dollar piece of farmland and manage it, which is obviously a nonstarter for just about everyone," Malloy said.

Malloy launched AcreTrader to democratize farmland investing and educate more people on the asset class. The platform selects farms for investors, places the farms in individual LLCs, and lets investors individually invest in the LLC. It is open only to accredited investors.

4 reasons to bet on farmland

Malloy bet on AcreTrader because of the asset class's multifaceted appeal. He shared his four-part case for why investors should consider betting on US farmland.

1. Low correlation with other assets

The returns from US farmland are even more impressive when investors take into account a low-yield environment where there's little reward for investing in bonds.

Investors have looked to riskier asset classes that are heavily correlated, making their portfolios less diversified. US farmland, on the other hand, has very little correlation with other major asset classes, with a 0.07 annual correlation with stocks and a -0.39 annual correlation with bonds over 20 years, PGIM found.

Malloy highlighted farmland's "almost zero correlation to the S&P, as an example."

2. Low volatility

The PGIM report found that farmland had produced the highest annual returns and Sharpe ratio — a measure of risk-adjusted return — over the past 20 years compared with stocks, bonds, and real estate.

A Sharpe ratio over 1 is considered good. Farmland had a Sharpe ratio of 1.21, according to PGIM.

"The price of it moves around far less than things like the S&P or gold, as an example," Malloy said.

3. Inflation hedge

A debate has raged about whether inflation from the global recovery will be transitory or permanent.

The US consumer price index's July reading represented a 5.4% year-over-year increase for the second month in a row — the biggest one-year jump since August 2008.

For investors looking to hedge inflation, US farmland may be a good option, as it has a high correlation with inflation, Malloy said.

4. Supply-and-demand dynamics

Investors make money in two ways from farmland investing: rent and asset appreciation.

Malloy said he believes that asset appreciation has been influential in producing farmland's impressive historical returns and expects that appreciation to continue.

"Every day we have more and more mouths to feed, so growing demand for products that come off of farms, and every day we have less and less farmland," Malloy said. "In the US, as an example, we lose about 3 acres a minute of farmland. It's obviously a very finite asset; you can't make more land. As a result, it's very fascinating supply-demand dynamics for the investors."

Accessing farmland

While investing in farmland used to have a lot of barriers, it's becoming easier. Platforms like AcreTrader and FarmTogether let accredited investors access investment opportunities.

Retail investors can gain access through real-estate investment trusts, or REITs, that trade on stock exchanges.

Another option, if you have the budget, can be to buy the land outright.

Questions to ask

For investors who choose to invest in farmland directly or through a platform, Malloy outlined three key questions.

1. Is there an operator of the farm?

Who will be managing and operating the farm daily?

2. What's the water situation?

How will the farm get water? In cases where there might be too much water, how will water get off the farm? Water supply plays a role in both farm income and asset appreciation.

3. What's the neighborhood around the farm like?

Understanding the neighborhood helps give investors an idea of the marketplace competition and the farming community — and the potential of the investment.

ncG1vNJzZmivp6x7o8HSoqWeq6Oeu7S1w56pZ5ufonynrdGmo5qmlGK2r8LErKuippditaqzx2awop2cmXq0wNGaq56fqWK2r7LLmquip55itaawxp5kmpuimsGzrcOeqWabkafBpr6MppilpJ%2BuenN8kWpkcQ%3D%3D