Why Investing in Farmland Is Good for the Planet and Your Portfolio
When it comes to making an investment decision, there are a lot of different factors that come into play.
For some people, the bottom line is always the most important thing. Others might be more interested in investing in something with positive social or environmental impacts. And then there are those who like combining financial gains with doing good – what's often referred to as "impact investing."
If you fall into that latter category, you might consider investing in farmland. Here's a closer look at why farm investments can be so appealing and profitable.
Farms Are Good for the Environment
From numerous discussions to the effects of climate change, it's difficult to overlook them all. From reported frequent and severe storms, warmer temperatures, and heat waves across the world to drought, scientists believe that these changes are irreversible in the next hundred or thousands of years. Furthermore, they predict an increase in global temperatures over the next few decades.
The key cause is greenhouse gasses, mainly culminating from human activities. The primary greenhouse gas emitted by human activities that have led to these drastic changes is carbon dioxide (CO2). In fact, according to research, carbon dioxide emissions contributed about 79% of greenhouse gas emissions in the US in 2020.
Bleak as the future may seem, there is hope. There are several proven ways of reducing the level of carbon dioxide in the atmosphere. Farms with existing trees and other types of agriculture rank high on that list.
Experts estimate that an average tree will absorb about 22 pounds of carbon dioxide annually in its first 20 years. The benefits of trees are indisputable, but the actual number will depend on a variety of conditions, such as the species of tree, water availability, soil nutrients and where it is located.
On the other hand, investing in "traditional" real estate increases your carbon dioxide emission footprint. McKinsey & Company estimates that the real estate industry contributes about 39% to global emissions. Manufacturing building materials, such as cement and steel, are responsible for a significant amount of these pollutants. The energy required to power these properties daily is also a contributing factor.
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Offset Other Investments That Add Carbon to the Atmosphere
Do you know if your investment portfolio includes assets contributing to carbon dioxide emissions? Besides traditional real estate investments, industries like oil and gas, manufacturing, and transportation are some of the top contributors to global warming.
Diversifying your portfolio with farmland is a wonderful way to offset other carbon-emitting investments in your portfolio. Whether you're growing crops, practicing agroforestry, or a mix of both, it'll be good for the ecosystem.
For example, one investment of $25,000 will "buy" an investor 175 trees which will absorb between 20-40 pounds of CO2 per year. If you figure a single typical passenger vehicle emits about 4.6 metric tons of CO2 per year - assuming 22.0 mpg and 11,500 miles per year on the road - investing $325,000 in farmland will be the equivalent of enough trees to offset an investor's commute.
Help the Global Community
According to the latest reports, global hunger rose in 2021 by about 150 million, affecting between 702 to 828 million people globally. In the United States alone, about 13.5 million Americans face food insecurity, according to the USDA.
As the world population grows, so does the demand for food. This, combined with the expected effects of climate change, suggests that global hunger could increase in the coming decades. By investing in farmland, you can help your portfolio grow while also making a positive impact on the environment and helping to fight hunger worldwide.
One reason investing in farmland is a good idea has to do with the fact that there's less and less of it each year. With so many people wanting to live in urban areas or build businesses, agricultural land gets turned into roads and buildings instead. And as you probably know, this affects how much food can be grown. By buying farmland, you're not only supporting farmers but also helping to slow down development on green spaces.
Secondly, the crops grown from your farmland investment could provide food for one or two families in America and around the world. By investing even a small amount of money into farmland, you can help improve crop production levels, crop diversity, and bring back land that has been damaged. This will then lead to more food items being available on the marketplaces. These extra products can either be used where they are produced or exported to other places. Both methods would assist in the global effort against hunger.
Farmland Offers Excellent Returns
Finally, a generous risk-adjusted return is perhaps the most convincing for an investor attempting to extract the most value from the market. Farmland returns in the US had a lower volatility level than equities and 10-year bonds between 2000 and 2018, and outperformed these investment classes while providing greater returns.
Investing in farmland is not only a great way to make money, but it also offers other benefits that make it an attractive investment strategy. Here are some of the reasons to consider investing in farmland:
1. Hedge against inflation
Farmland returns have performed better than other investment assets when it comes to consistency and resilience against economic cycles. As the Director of the TIAA Center for Farmland Research at the University of Illinois Urbana-Champaign recently reported:
"Historically, the conventional narrative around farmland as a financial asset is that the returns are positively correlated with inflation, have low or negative correlation with equities, and have positive portfolio benefits in well-diversified holdings due to the relative lack of response to short-term broad market movements."
2. Diversifying your portfolio
The objective is to decrease portfolio volatility by having diverse asset categories. The less correlated the assets in a portfolio are, the more diversified it is. Farmland investing has shown to be a fantastic diversifier. It has a low correlation with other types of assets like equities, bonds, and traditional real estate investments.
3. Minimal volatility
While real estate and other assets react to changing market circumstances, farmland investing has remained steady and yielded excellent returns throughout all economic cycles. The start of the Covid-19 epidemic, for example, disrupted numerous sectors and global markets. However, farmland investments remained stable since food is always required in the world. Because the world population will continue to grow, it's clear that this asset's stability will endure. And that's what every investor looks for - a secure investment asset that doesn't fluctuate much over time.
Farmland investing has allowed people to invest in farmland, even if they don't own the land. Consequently, it could be a great addition to your investment portfolio if you're searching for a more diversified asset.
Farmland investing has yielded higher returns than equities and bonds over a ten-year period between 2008 and 2018. Plus, it gives your portfolio extra diversity since it doesn't correlate highly with other types of real estate assets, bonds, or equities. Even better, history has shown that farmland is an excellent way to naturally protect yourself against wealth destroying effects of inflation.
Plus, of course, it is nice to know that part of your portfolio is helping to reduce the harmful effects of CO2 in the atmosphere and that you are offsetting, even if only in a modest way, the impact we all have on climate change in our daily lives. Especially if you can accomplish that goal while making money for yourself at the same time.