The Race for Farmland
Diversify, Sharpe Ratio, FarmTogether and more!
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Bill’s Big Bet
Whenever investors, business moguls, or billionaires make moves usually their investments make the front page. We saw Dr. Michael Burry (yes the drummer fund manager from The Big Short that bet against the housing market in 2008) start buying millions of dollars of GameStop stock a year ago which caught my attention. Why is Burry buying GameStop when it seems that everyone is selling? Low and behold, just like in The Big Short, Burry struck gold (for the second time) and his investment amassed an insane gain as $GME stock rocketed to outrageous heights as shorts were squeezed for every penny. At one point, Burry’s investment reached a 1,500% gain, and his 1.7 million shares valued at around $271 million at the peak. A stroke of luck? Possibly, but he seems to get lucky a lot…
Several months ago, it was also made known that the founder of Microsoft, Bill Gates is officially the largest private farmland owner in the United States. Obviously, this caught my eye and I had to dig deeper. According to The Land Report, Bill and Melinda Gates own an estimated 242,000 acres of farmland across 19 states with 69,071 acres in Louisiana, 47,927 acres in Arkansas, and 25,750 acres in Arizona. Regardless if you are a Gates’ fan or not, I think we can all agree that the man is one of the most business-savvy individuals of our lifetime and is undoubtedly one of the most well-connected individuals on the planet. Why does Bill Gates, an internet and computer tech billionaire want to own farmland?
“Diversification is the only free lunch in investing”
- Harry Markowitz, Nobel Prize-winning economist who devised the modern portfolio theory
As I have preached relentlessly on my Twitter, Instagram, and in my newsletter, I believe that every intelligent investor should be properly diversified in their investments. If able, I believe people should hold stocks, bonds, real estate, crypto, and any other forms of alternative assets that can benefit a person’s entire net worth and the future of his or her family. Simply put, having your entire investment portfolio pegged to one asset is in my mind outright dangerous and not a great path to building generational wealth. Markowitz's quote has famously lived on for decades because of its screaming accuracy and profound simplicity. Markowitz was trying to demonstrate that an entire portfolio’s performance and composition were much more important than the performance of a single stock or asset. To do this, he visually illustrated his beliefs with the “efficient frontier” in which the most optimal portfolio is one that is crafted with a perfect balance of risk and return. If someone walks into a casino and puts all their money on red and wins you and I would not consider this person to be a savvy gambler. Instead, we would consider this person to be lucky, crazy, or both. By using metrics such as the Sharpe Ratio, we can begin to figure out what stocks, assets, and total portfolios lay on this efficient frontier and what investments have a bad, good, or great return for the level of risk put forth. I could go on for days about the modern portfolio theory, Sharpe Ratio, and why diversification is so key to being a smart investor (and I plan to in future newsletters) but today I am going to move forward with why investing in farmland, in particular, has proven to be a brilliant investment vehicle for a well-diversified portfolio.
Quick Sharpe Ratio breakdown:
The Sharpe Ratio is a ratio that is used to explain the level of risk an investor is putting down for the level of return expected. To do this you subtract the return of the portfolio by the “risk-free rate”. The risk-free rate is a return given for an investment that has no risk. Often times this would be a government bond such as a U.S. Treasury Bond or 90 day Treasury bill. This number is then divided by the standard deviation of the portfolio’s excess return which is a fancier way of saying volatility/risk of that portfolio. Obviously then the higher result of the Sharpe Ratio the more favorable investment for the investor.
Source: Investopedia
Why Invest in Farmland?
Let’s list the obvious:
1) Only 7% of Earth’s land is suitable for cultivation - with the global population theorized to climb to 10 Billion by 2050 the demand for food is expected to be 50-70% higher than it is today. Source: FarmTogether
2) America is eating healthier - A LOT healthier. We have all seen companies such as Beyond Meat, Tattoo Chef, Impossible Foods and other plant-based meal options explode onto the scene in recent years. Guess who owns a very large position in Beyond Meat and Impossible foods? You guessed it, Bill and Melinda Gates. As these alternative plant-based food options become more available to the market, the demand for food and farmland is paramount.
3) Urbanization - As the population grows so do the country’s many bustling cities. More people + more people eating + less space for farmland = farmland becomes more valuable.
4) Inflation - In 2020 about 20% of ALL U.S. dollars were printed in a single year. That means for every 5 dollars in your wallet 1 of them was printed in 2020 alone. Every investor is worried about inflation and farmland has famously been one of the best ways to fight inflation in your portfolio. Source: Cityam.com
What are the returns of Farmland?
As we have stated before, diversification is key when it comes to building a portfolio for generational wealth. Using the metrics covered earlier, having a portfolio with an appropriate risk-adjusted return is critical for improving your entire portfolio - keeping your risk low (higher Sharpe Ratio), diversification high, and performance high will, in the long run, deliver the best results. Along with this, we want our assets to not correlate. For instance, if we only own Microsoft and Nvidia stock and the tech market crashes we will see a significant loss in our portfolio since those two tech stocks are highly correlated. If we own only Berkshire stock $BRK.B and the total stock market takes a dive we are in hot water as well because that fund is largely correlated to the entire market.
Below we will see not only the correlation (or lack thereof) of farmland to other investment vehicles but also the incredible performance of this sector over the decades.
You can go further and see what adding only 15% of your portfolio to farmland can do to your average annual return, standard deviation, and Sharpe Ratio as seen below.
In total, investing in farmland has proven that it has specific advantages when it comes to being most risk-efficient, providing incredible returns, and a brilliant way to have an uncorrelated asset included in your overall portfolio.
How can I invest in Farmland?
For most alternative investments, there usually is a large barrier to entry for a normal person to participate in the fun. FarmTogether, which has provided much of the unique data and analytics for this article, changes that barrier to entry and in minutes you can be signed up on your mobile device and ready to start diversifying your portfolio. All your investment decisions, due diligence, and legal paperwork can be monitored on your phone!
How does FarmTogether work?
1) FarmTogether's investment committee selects the top properties from hundreds of investment opportunities after analyzing soil quality, water availability, capital improvements and on-farm equipment, market access, local legislation, overall climate impact, and a host of other metrics. Once FarmTogether’s team feels that it is a suitable investment it is placed on the platform.
Below is an example of what these investment offerings can look like:
2) Since these investment offerings are legal entities (LLCs generally) you are actually purchasing shares of that LLC when investing on FarmTogether thus making you entitled to returns from its operation.
3) After selecting your investments on the FarmTogether platform, you can then monitor your investments, receive key performance indicators on productivity, track land valuations, view photos and videos, and more. If investing in a cash rent lease the farmer pays all the input costs (seeds, fertilizer, etc.) and FarmTogether takes care of the property taxes, insurance, and other expenses. Investors receive cash distributions from net profits after all fees generated by the farm.
4) Quarterly or Annually (depending on the harvest/ lease agreement) investors will receive cash distributions.
5) After the property’s target hold period expires the investors get their share of capital gains from the sale of the farm. All details about the cash distribution, target hold period, and many other details are outlined vividly for each investment on the FarmTogether platform.
In conclusion, FarmTogether is a very unique company offering investors the ability to diversify their assets into investment vehicles that the general population does not have access to. If you are interested in FarmTogether and want to look into possibly becoming a farmland investor click the link here.
Hopefully, in this newsletter, you learned a thing or two about the infamous Sharpe Ratio and were also opened up to a new type of investment vehicle!
Have a good rest of the week,
Before you go, If you know someone who is interested in farmland or diversifying their portfolio please give this a share!
NEW PODCAST
If you weren’t aware, I started a podcast/show with my man Zaid Admani who also enjoys sharing business and market content to his 236k TikTok subscribers! So far we have posted 3 podcasts on our Youtube, Spotify, and Apple Podcast pages. Please check them out and maybe give them a follow or share!
Spotify:
Apple Podcast: https://podcasts.apple.com/us/podcast/no-cap-all-gains/id1515426980
Youtube:
Great read Gannon! Thank you for all you do. Nice work on the photoshop ;) $APPH is another one I have my eyes on.
Great post. An additional way to invest in farmland is through publicly-traded REITs, $LAND and $FPI. I don't follow $FPI but I follow $LAND closely. Being public-traded, it's day-to-day price is more correlated to the market, but the underlying asset is still farmland. If anyone has any questions, feel free to reach out.