Why Farmland Will Outperform In 2024

From the looks of it, 2024 will be another year of complexity for investors. But during these times, there's one asset class that consistently outshines its competition - farmland. Here are three macroeconomic forces that are likely to keep driving up global farmland values in 2024.

Commodity Prices

Entering 2024, we're seeing an unprecedented alignment favoring primary goods: first, the initiation of a path of lower interest rates, and second, higher inflation rates that have consistently surpassed expectations. The Federal Reserve has adopted a strange position, appearing to accept elevated inflation levels alongside increased economic activity.

This dovish stance facilitates price surges  in commodities such as gold (currently hovering near historic highs), oil, and agricultural products.

Furthermore, the agricultural sector benefits from certain structural peculiarities. Its prices are weather-dependent, meaning that weather events in one part of the world can significantly impact markets in another. A hurricane in Mexico would disrupt harvests and create price increases for Colombian lime in the United States, for instance. 

This becomes increasingly relevant as the world continues to move towards more climate-friendly agriculture. At the UN’s climate conference in December, the Food and Agriculture Organization (FAO) published its long-awaited road-map to net-zero agriculture, which outlines a plan to orient food systems towards sustainability. Much of this plan involves shifting dietary patterns away from meat and towards plant-based products, and to promote the consumption of healthy foods and cleaner food sources. 

This proposed change in diet will require a larger expanse of cultivable land, while reducing the area designated for livestock. Given that most land isn't conducive to farming, and that the total amount of available arable land worldwide is declining, this shift is likely to positively impact the global value of farmland.

All these factors, some with immediate effects and others with a more gradual impact, are pivotal in understanding the agricultural sector's future. While inflationary expectations show across all sectors, the prices of goods within the agriculture industry are structured to benefit more significantly from these trends.

Inflation Expectations

In December, the FED announced its intention to start decreasing interest rates in 2024 - a move that came faster than the market expected. However, recent inflation figures indicate that the current core inflation rate sits at approximately 4% annually. Essentially, the Federal Reserve has partially conceded in its battle against inflation and aims to sustain the present levels of price increases over this year.

This decision to keep base inflation higher will likely lead to a faster decline in the value of the American dollar, especially in terms of commodities. Because commodities are at the forefront of production chains, they bear the brunt of inflationary pressure, which then passes along to the downstream phases. 

This has already driven prices up significantly, and will continue to do so. Gold, for example, has reached a new all-time high in recent weeks.

As we’ve discussed in previous articles, there are numerous reasons to anticipate that the agricultural sector stands much to gain from the increase in commodity prices. But the Fed’s resignation to higher inflation levels also poses challenges.

For example, considering general price trends, there are clear incentives to avoid holding liquid dollars. Any stored liquidity will gradually evaporate in value as prices continue to rise. Inflation hedging will be a major priority for investors in 2024.

This combination of factors leads us to believe that farmland will be among the best-performing asset classes of 2024. Farmland, of course, has always been an outperforming asset during inflationary periods, as we saw during both the 2008 crisis and the crash of the dot-com bubble. Not to mention that most of the major banks foresee a sizable market correction in the coming year.

Decoupling from China and International Trade

The last major trend that will boost farmland assets in 2024 is geopolitical. In recent years, Western countries have undertaken a major strategic shift, switching focus from global economic growth to territorial economic control. This shift is leading to geoeconomic fragmentation, resulting in the formation of distinct economic spheres of influence. In this context, the United States is looking to reshore and nearshore its production as much as possible.

Put simply, the United States is looking to economically decouple itself from China and Russia and relocate to countries more aligned with the Western political order. This effort has been felt across many sectors of the economy, but is particularly pronounced in agriculture, both in terms of imports and exports.

One of the key challenges is identifying countries that offer the optimal blend of low costs, production quality, and a lack of geopolitical risk. Mexico, as a third-party industrial producer, and Colombia, as South America's sole extra-NATO ally, gain increased importance for the U.S. in this light.

However, changing suppliers isn’t cheap for the U.S.. The cost of imports in the United States is rising, causing countries involved in nearshoring to experience a "wealth shock." Large-scale injections of U.S. dollars into emerging economies to shore up sources of production will lead to a trajectory of growth that will massively reward investors.

The declining value of the dollar internationally favors investment portfolios with exposure to multiple countries, especially those that are commodity producers,, as evidenced by the continued decline of the dollar against other currencies. There’s a clear takeaway here: commodity-producing assets in foreign domiciles will be a big winner.

Conclusion

Farmland has long been one of the best-performing counter-cyclical assets on the market, and with many experts predicting a severe correction in 2024, it may be time for farmland to display its resilience once again. With inflation now setting in for the long term and commodity prices off the charts, farmland is a clear choice for forward-thinking investors who understand the geoeconomic landscape. 

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