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.
Follow the Smart Money
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.
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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.
Why farmland?
A Fertile Investment
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,
Chris
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.
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This is a very interesting article but I have one question : how does one invest in farmland as a private investor ? Thank you very much,
sincerely,
Marc Haagen
Belgium
Good Article. You are seeing it correct. As the urban centers are abandoned because of deteriorating petro-fueled supply lines we will find ourselves in localized, smaller accessable communities. Transition villages are forming as we speak. I look for a Corpra-Farm to compete with or join the transmorphing Petro-Pharma complex.
Cheers!
M
And yes, many people I know including us are starting veggie gardens and getting backyard chickens. I think it's a real trend. (and, yes, if I'm going to bother to plant veggies, I'm going for heirloom varietals and organic methods)
Modified seeds will feed the world once they are allowed to. Farm land may go up in value but organic will not be the reason why or even a viable alternative to GMOs.
Stick to oil and gas...
I don't know from nothin' about trading, but I think that you are spot on with bringing this up. I grew up on a farm in SW Michigan 60+ years ago and as I reflect back on my earliest years we were farming then in much the same way we'll have to farm in the future, small tractors, a significant percentage of fertilizer from animal manure, perhaps horses for the lighter lifting, and considerably less arm chair, air conditioned, petrol guzzling luxury work.
Early in your article when you talked about the huge government anbd private investors in farmland, I was afraid you had missed the point. But you came down in the end to close in to urban farming that will be a mainstay eventually. It reminded me of a story a friend told me about Toledo, OH, devastated by the decline of manufacturing to the point where whole neighborhoods of new housing tracts with sewer lines all in that were going begging, until the city wisely decided to lop them off and encourage centralization. These lands are just the sort Toledo needs for agriculture. And not just outside the city either, but inside as well. If you or your readers haven't seen this recent article, have a look: http://www.nytimes.com/2009/07/05/magazine/05allen-t.html?_r=1&th&emc=th
Keep on tellin' the truth!
Investors snapping up farmland will drive up the price of farmland and drive existing farmers out of business. In Western South Dakota, we've seen investors such as Ted Turner doing this very thing--so ranch families end up boxed in and unable to buy land for their kids.
Do you think those farmers and ranchers will want to then come back to what was once their land and work for you? If you do, you know very little about farmers and ranchers.
Farmers and ranchers working their own land protect that land and take a stewardship role. Sharecroppers and managers aren't going to give a damn--and "your" yields, returns, and safety records will demonstrate this.
If you want to enhance food security, help farmers stay on their land, and help them invest in education, technology, and sustainability.
Curious article you offered your readers. Very interesting to say the least. I think what you should have said about the Government is that they subsidize the oil companies with free water, i.e. Alberta.
I've written a short science-non-fiction piece about the intentional burning of water. It mentions so much of your current stance on food prices, as a result of peak oil. I would love you to read it. It's all about the water Chris.
You and your boys know that best.
Leave me an email. I will send you a copy of Burning water...
According to Lester Brown, in Plan B: 3.0:
"Since it takes 1,000 tons of water to produce one ton of grain, as noted earlier, importing grain is the most efficient way to import water. Countries are, in effect, using grain to balance their water books. Similarly, trading in grain futures is in a sense trading in water futures."
So where do we invest?
Cordially,
Michael Zitron
find water..grow grass..bring in
animals(holy cows,useful bulls).
generate your own gas/energy.
grow for your own requirement of three years.stock.repeat in the
next season.grow and sell the surplus.find contentment in the simple yet secure life this may
bring in.
all this one time investment.
you may have to get salt from
outside perpetually.
any takers?
One is the smaller, local, organic farming, and the other is the greater dominance of large farms and vertically integrated food corporations.
In the long term, I see organic farming at any scale becoming more and more dominant. While individual cases may vary, the data from around the globe on literally thousands of farms shows that the average use of outside inputs and production volatility clearly favors the organic farmer.
Vast areas of the US and Canada have farmland far from population centers. We could see those areas transition to organic in the context of large land-holders. One way to do this and still keep these as "family farms" is to have private equity or government funds pay farmers a living wage during the organic conversion process, perhaps for equity stakes in the land. This might set up a long-term risk share system in which the interests of the farmers and the outside owners are aligned. Other benefits to farmers could include these financial interests pay to re-establishment of grain banks and other measures to keep commodity volatility low and make sure prices cover production costs plus.
Near population centers it makes a lot of sense to have small scale farms specializing in vegetable and esp. small livestock and dairy production. A multitude of operators creates diversity and resilience, which in these economic times is perhaps more important than pure rate of return metrics.
Thanks for a great article.
First of all, actual research carried out by a number of universities, governments and food NGOS show the opposite when measuring the productivity on farms and in scientifically designed comparison plots.
Organic farming has higher overall average yields than conventional over the long-term. Volatility of production is lower on organic farms.
John is correct about the organic food import problem in North America. Only 0.5% of farmland is certified organic, whereas 3.5% of food dollars are. This discrepancy is behind the need for food processors to import, and is what keeps prices high.
But to suggest this is elitist misses some key points: 1) organic farming is the dominant form of farming for most people in the world who can't buy expensive off-farm inputs, and 2) the under supply of organic farms, not the cost of production, is what keeps prices high for those who pay for food.
The carbon footprint of organic farming is generally smaller than for conventional. What John brings up is the impact of long-distance imports to the total energy needs of the organic food system. To overcome this means not rejecting organic farming, but developing local and organic food systems.
Lastly, the current food system vastly over produces. About HALF of U.S. grains go to feed livestock. Much of this works to take a steer weighing 1000 lbs and give it grains and soy for 6 weeks so it weighs 1200 lbs before slaughter. This is an entirely wasteful, unhealthy, and environmentally disastrous way to raise meat.
Therefore, if done right, nearly half of US grain production could be eliminated without causing a rise in grain prices or starvation. The other fact to consider when making this point is that only 10% of world grain production is traded internationally. It is another myth that US grain "feeds the world." It mostly feeds cattle.
I am not going to put a lot of references here because they can all be found in this document:
http://www.farmlandlp.com/FarmlandLP-SustainableAgWhitepaper.pdf
Interesting article, thankyou.
Sam - Australia
Incidentally, "conventionally grown" is a misnomer perpetuated by grocers who don't want to label food as "pesticide-grown." Organic farming has been the convention for 10,000 years and remains so in much of the world. There is nothing conventional about petroleum-based farming.
Organic advantage = Cheaper, ( no Fertilizer no spray, higher prices for produce produced, most sold to local markets.
Convential advantage = much higher yields, system set up to accept product grown, easy weed and other pest controls.
The disadvantage is that it costs hundreds of $ per acre to put the crop in the bins.
To make it worse Monsanto is on a real gig to market geneticly modified wheat. This will give them control of the wheat seed.
The world has consumed more food than it has produced in 7 of the last 10 years. The panic has been kept under control by the major importers shortening their just in time buying practises.
Organic farmers are good for all farmers as they short the market due to smaller production.
Most farmers look forward to someone else having a crop failure so that prices will rise enough to make a decent living down on the farm.
Have you heard that farmers may be allowed two wives. Between the two of them they can make enough money working in town to support the farm.
Normally farmland sells in parcels for around $300k and the owner has the responsibility of managing the land and finding a tenant to generate an income from the land.
I am with Agrinuity, a company which helps individuals invest in farmland in smaller dollar amounts than otherwise economically feasible. We purchases large tracts of farmland, sell them to individuals in smaller parcels to lower the investment bar, manage the land, find tenants and negotiate competitive leases. These properties generally return between 4-5% before appreciation.