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How to Hedge against Inflation with Income-Generating Farmland in 2022

US monthly inflation graph up to feb 2022

Get on the Right Side of Inflation! Grow Premium Fruit and Vegetables with Titled Agricultural Real Estate in Paraguay

Supermarket visits and filling up the car have become gradually more expensive over the past year as prices for groceries, goods, and commodities are rising faster than usual. In fact, both the US and Europe are seeing prices go up at their fastest rate in 40 years, not seen since the early 1980s!

Graph: US Monthly Inflation Rate

Supply chain disruptions and pent-up consumer demand for goods have been driving this elevated inflation following the reopening of the economies in 2021. The situation worsened as the Russian invasion of Ukraine caused oil and natural gas prices to jump, which helped drive petrol and household energy bills to all-time highs.

The hope is that inflation levels will go down again if these issues resolve themselves. But it’s looking more and more likely that high inflation will linger longer than desired, and this is why investors have been inflation-proofing their portfolios for the past 12 months.

Historically, gold is the most common inflation hedge investment, and investors tend to flock to gold during crises and drive its price higher. But gold is already trading at very high price levels due to the COVID-19 situation, which is why farmland is finding a lot of favor as an inflation hedge.

Farmland is negatively correlated against the Dow Jones Index and positively correlated with the CPI (consumer price index), making it arguably the absolute best hedge against inflation. In addition, well-managed farmland earns an annual income from crops, which gold does not.

Historically farmland has always experienced growth during periods of rising inflation. It’s not just the value of your land that tends to keep pace with inflation as the returns on your crops also increase as the price of food increases. In the last 50 years, food prices have consistently risen, and while inflation averaged around 3%, the prices for food have increased about twice as fast over the long term.

Another reason farmland is a good hedge against inflation is that input costs, such as fertilizer and fuel, increase incrementally at a slower rate than food prices. This lag between input costs and returns means income-producing farmland remains profitable during inflationary periods.

Stocks, on the other hand, are not a hedge against inflation. If inflation goes up, the price of commodities increases, which means higher production costs for businesses. As interest rates rise, borrowing costs will also increase because more money needs to go out on loans, forcing companies to deleverage and cut investment. Higher interest rates also put pressure on the demand because consumers’ disposable income decreases, resulting in lower sales.

Experts, like veteran economist Andrew Smithers, proclaim that the valuation of US stocks could tumble under these inflationary circumstances. His concerns should hold some weight, considering he was one of the few economists warning about the internet bubble and the risks posed by the subsequent global credit boom.

Investors have already started buying more US farmland to hedge against inflation, leading to land values in the Midwest grain belt, the most mature and liquid US farmland market, gaining 25-30 percent in the past year. But, as land prices rise, competition for available farms in the US has intensified, and investors have to look harder to find attractive farmland today.

Higher land prices have, in some cases, already outstripped farmland’s earnings potential in the US. Investors are also paying high land prices when farming input costs such as fertilizer and diesel increase.

While purchasing arable land is already at a premium in North America, there are opportunities for lower-cost investments across borders where land prices are still lower. Take Paraguay, for example. 95% of their territory is suitable for food production, and land prices are still competitive, though rising as the pace of urbanization picks up.

Paraguay’s subtropical sunshine, fertile soil, and the short period of winter cold make it ideal for growing high-quality crops. They also have access to a young, motivated, and cost-competitive workforce (70% of the population is under the age of 35) and low-cost energy (Paraguay is the #1 producer of renewable energy per capita in the world and only consumes about 10% of the energy they produce).

Investing in farmland off-shore provides international portfolio diversification and often offers higher profit potential. For example, farmland investments with an experienced provider like Paraguay AG Invest / Agriterra offer projected returns from 12% ROI per year.

Traditionally, investing in farmland tends to be reserved for larger institutions or wealthy individuals (Bill Gates has been the largest private farmland owner in the US since 2021). However, Paraguay AG Invest / Agriterra still offers farmland investment opportunities starting from $18,500.

This one-off cost will give you clear title of your lot of farmland, meaning you will profit from the land appreciation. In addition, you sign a farm management agreement, allowing them to farm the land on your behalf. They take care of everything, from planting & harvesting to sales, and you will receive your share of the profits from your produce annually.

A passive turnkey investment like this means you don’t need any farm operations and management knowledge to reap profits from farming. It makes inflation-proofing your investment portfolio with farmland real estate easier and more accessible than it has ever been before.

Contact us for more information or the latest availability and pricing of our various income-generating farmland opportunities.