What should a long-term investor invest in when stocks and bonds aren't working very well?
I've been asking that question a lot lately.
Bonds continue to be hostage to the Fed's monetary policy manipulations, and as such are entangled in the complex web of the global currency trade. It's a hot area for smart forex traders (and about to get a whole lot hotter) but for most mortals, it's just another way to get burned.
Equities continue to struggle through the recession, with the Dow Jones Industrial Average exactly where it started the year, and the S&P 500 index up a paltry 4%. The NASDAQ is up 20% YTD but I think much of that growth is predicated on "green shoots" hallucinations, and it's probably headed for a fall.
A few stalwarts of the commodity trade have fared considerably better this year, with the Market Vectors-Coal ETF (NYSE: KOL) up a smart 62% YTD and the Oil Service HOLDRS ETF (NYSE: OIH) up 36%. However, the United States Natural Gas Fund (NYSE: UNG) is down 47% on the year, the PowerShares DB Agricultural Fund (NYSE: DBA) is down 8% and the PowerShares DB Corn Index Tracking Fund ETF (NYSE: DBC) sports a mere 1% gain on the year so far.
Even gold, the most traditional safe haven, seems to have lost its luster (though some argue its trade has been manipulated). The SPDR Gold Trust ETF (NYSE: GLD) is up only 6% on a year in which the fear of inflation has loomed over-large.
In my view, oil and coal have gained largely as anti-inflation trades this year, and both could take a good haircut here due to a strengthening dollar, incipient carbon pricing and waning inflationary fears.
Conversely, natural gas and agriculture have been shunned this year as the ugly stepchilds of the commodity trade, and both look ripe for a rebound. While those opportunities are interesting, they are probably good trades for a few months at best. I would not call them safe havens for traditional buy-and-hold investors.
In fact, there may be no such thing. In private conversations with numerous associates of mine, it would appear that the really successful investors—multimillionaire and billionaire money managers with decades of experience-are taking their marbles and going home. In their judgment, the markets are simply too corrupt to play anymore, and Goldman Sachs is Public Enemy #1 with alumni now staffing all the key posts at the Fed, Treasury, SEC, and on down the line. (I will spare you the links on this topic, but a little Googling around should give your blood pressure a good bump.) The unprecedented moves that these entities have made over the last 18 months in an effort to stave off collapse have utterly destroyed what little remained of the "full faith and credit" of the U.S. Government.
What, then, are they putting their money into?
The answer may surprise you: farmland.
Legendary investor Jim Rogers has been all over the investing press this year, saying that farmland is his preferred vehicle. "If I'm right, agriculture is going to be one of the greatest industries in the next 20 years, 30 years," he said in a March interview with CNBC. He is now the director of two funds which are developing new farmland in Brazil and Canada.
Major investors who have caught the farmland fever include George Soros and Richard Rainwater. A host investing houses like TIAA-CREF and BlackRock Investment Management have plowed serious cash into the sector as well.
Most recently, Qatar, Abu Dhabi, Saudi Arabia, United Arab Emirates, China, South Korea, and Egypt have all made the investing press for taking multi-billion dollar stakes in large tracts of farmland in relatively unexploited areas of the world, primarily in Africa and Asia. Not just because they like the investment outlook, but because they are worried about securing enough food to feed their own populations.
Fortune magazine quoted Lord Jacob Rothschild in a major feature last month ("Betting the farm") as saying "We think right now is an excellent point of entry for taking a long-term position in agriculture." I suppose I needn't point out that one could do worse than to follow the example of a 73-year-old member of a 200-year-old banking dynasty with a personal fortune of some $600 million.
A new crop of funds like Rogers' has sprung up to provide other funds and wealthy individuals a way to play the farmland rush. Investors who need smaller stakes are turning to farmland limited partnerships and LLCs.
Craig Wichner, director of the new FarmlandLP, is taking the concept a step further by acquiring degraded conventional farmland, upgrading it to certified organic status over several years, and then putting it into full organic operation. Organic farmland is more resilient to weather challenges than conventional commercially farmed land, and needs far less in the way of petroleum-based inputs including fertilizers and fuel, he said in an interview with me. It can also provide the equivalent of 34 barrels of oil per acre in CO2 sequestration, as opposed to being a net carbon emitter.
First and most obviously (as the old saying variously attributed to Will Rogers and other turn-of-the-century Wyoming cowboys goes) they aren't making any more of it. Unlike the classic inflation hedge of gold, which doesn't create value, farmland's value is based upon the crops it produces, so it tends to hold its value and appreciate over long periods of time. One could argue that it's the supreme inflation hedge—no doubt a major motivator for the smart money to pursue it.
Another key reason is that global food demand is expected to double by 2050, as the global population increases to over 9 billion people and a wealthier world increasingly chooses meat over beans and grains. Leaving aside the population projection, which I have questioned previously, it does take an average of 8 kg of grain produce 1 kg of meat. Global wheat demand has outpaced production in 7 of the last 8 years, and global grain stockpiles have fallen to their lowest levels in decades. The supply and demand imbalance for such a critical commodity spells increasing profits.
Most compelling for investors though are the returns. Conventional farmland returns 5%-11% annually, and organic farmland can offer 15% or more. Yet over time, it has about half the volatility of stocks. For a solid, long-lived asset, that kind of return makes farmland an ideal low-risk component to a portfolio.
Beyond hedges and returns, though, my readers know what my main concern is: peak oil and gas. When people ask me what my top concern about peak oil is, I tell them food.
We need look no farther back in history than last year to see how rising energy prices almost instantly translate into higher food costs, and even shortages. These rising costs, in addition to concerns about food safety, have caused an absolute boom in backyard gardening over the last several years, with major gardening retailers having trouble keeping their shelves stocked.
In America, our food travels on average 1500 miles to reach our tables. An average 10 calories of fossil fuel are embedded into every calorie of food we eat, including petrochemical pesticides and herbicides, petroleum fuels to run farm machinery and refrigerated transport vehicles, natural gas for fertilizer, drying and processing, and so on.
Clearly, in a post-peak world, the existing model of food production and distribution cannot survive for long. As fossil fuels peak and decline, food production must return to local distribution and in-season, organic production methods. In time, the value of local farmland could compete with prime corn-growing farmland in Iowa, which currently gets a much higher premium thanks to the hidden subsidy of cheap fossil fuels for transportation. All that will change as we slip down the back side of Hubbert's Peak.
The reversal of the decades-long trend away from family farms and toward concentrated commercial farms will reap additional benefits, including more resilient local economies, healthier and safer food, and a restored environment replete with natural biota instead of petrochemicals.
It may sound like an outlier thesis in this age of Monsanto and ADM, but I have no doubt that farmland, particularly farmland that supplies food locally, is one of the most sensible and stable investments of the next century, along with associated assets like equipment, fertilizer and heirloom seeds uncontaminated by GMOs. No doubt at all.
Although it's intimately related to peak oil concerns, farmland is a very different investing angle than what we usually cover in these pages. I'm curious to hear what my readers think about it. Please drop me a comment below and share your opinion.
Until next time,
Investor's Note: Let's face it, I'm not the only investor concerned with peak oil. Take my colleauge, Ian Cooper, for example. He's already taking the upcoming oil price shock to the bank. Personally, I prefer to see my readers get a piece of the action, too. The problem, however, is that window of opportunity is rapidly closing as we edge closer to the backside of Hubbert's peak. Maybe it's time you pocketed some of these gains for yourself. Simply click here to learn more about these opportunities.