The potential for inflation has been a hot topic in the financial industry for several years, but especially since the COVID -19 pandemic began and government aid programs began rolling out. Since crystal balls are in short supply, we’ll focus here on what we observe and what we know about investors.
“Logically, we should expect inflation,” says Leif Snethun, CEO of Avenue Living’s Agricultural Land Trust, “but it also seems that logic is increasingly scarce in this world, so it’s hard to say what may happen. But we can talk about what’s happening right now, which is that investors are flocking to hard assets.”
We are seeing some commodities reach all-time price highs and many experts believe they’ll continue on that trend for some time to come. It’s difficult to say whether these prices are the result of inflation, a response to the interruptions in transportation seen in the past year, or a combination of the two.
“When farmers have greater net profits, they’ll spend more on land,” says Snethun. Increased rents can help to drive returns for Avenue Living, which invests in agricultural land and leases it back to farmers for cash rent. “A farmer is also willing to pay higher rent when commodity prices are more robust.”
We believe real estate can generally be used as a hedge against inflation. A “hedge” is an investment strategy that is used to mitigate potential risk. It’s a strategy that aims to offset potential losses and uncertainty in one investment, by taking a position in another investment that could do well should the risk actually occur. As real estate has historically maintained or appreciated in value during inflationary periods, it is often viewed by experts as a strategic hedge to inflation. In the current environment we’ve seen investors flock to hard assets, including agricultural land — a move that follows this conventional wisdom.
Agricultural land is seen as a hedge against inflation for several reasons. “It has historically maintained its value, even during periods of public market weakness. There’s a natural alignment between the landlord and tenant,” says Snethun. “In terms of maintaining the land, the carrying costs are low — there are no buildings or structures to look after. And, unlike other commodities, such as gold, it pays a rental yield while you hold it.”
There’s data to back up this assertion. A recent white paper notes that between 2000 and 2020, farmland value outpaced inflation by 129.4 per cent. If, as the paper suggests, “the best predictor of the future is the past,” we can assume that real estate and farmland will continue to be effective hedges against inflation.
The Avenue Living Agricultural Land Trust holds over 45,000 acres of agricultural farmland in Saskatchewan. The Trust invests in an operating LP which purchases farmland and leases it back to farmers for cash rent, allowing them to focus their capital and efforts into the best practices of farming. While farmland across the country continues to appreciate, land in the Prairie provinces, in particular, is set to appreciate at a higher rate than in other areas, after decades of being relatively undervalued.
Regardless of whether inflation is on the horizon or not, Avenue Living continues to follow its strategy of investing in hard assets, including agricultural land, class B and C multi-family residential and commercial real estate, and self-storage properties. Our model shows that even through periods of economic downturn, alternative investments have the potential to both provide stable returns and add value.
This commentary and the information contained herein are for educational and informational purposes only and do not constitute an offer to sell, or a solicitation of an offer to buy, any securities or related financial instruments. This article may contain forward-looking statements. Readers should refer to information contained on our website at www.avenuelivingam.com for additional information regarding forward-looking statements and certain risks associated with them.