What farmland investing brings to the table

Bottom line up top:

Can investors carve out space for gratitude? Markets head into Thanksgiving week digesting two very different main courses: a softer-but-still-growing labor market (Figure 1) that could use some warming up, and a platter of piping hot earnings from tech giant and AI bellwether NVIDIA Corporation. Together, this duo of dishes suggests that even if the economy's trip to bountiful proves less productive than hoped, growth is still on the table.

Last week's release of September's long-delayed jobs report showed nonfarm payrolls rose by 119,000 for the month, more than double consensus forecasts of 50,000. This upside surprise didn't quite qualify as comfort food, seasoned as it was with some concerning details: Job totals for August and July were revised downward by a combined -35,000, and the unemployment rate ticked up to a nearly four-year high of 4.4% as more people returned to the workforce but were unable to find new jobs quickly.

Moreover, since September's tally doesn't reflect sizable layoff announcements from some of the biggest U.S. employers in recent weeks, the official numbers may understate labor-market weakening as it occurs in real time. Subsequent monthly job reports could prove disappointing if layoffs gather steam. For now, the data argues for the Federal Reserve to stay on a gradual path toward easing, but without the urgency a much weaker employment report would have stoked.

AI serves up another gravy boatload of earnings. The labor market may be lukewarm, but the AI economy is red-hot. NVIDIA's latest quarterly results, announced last week, included record revenue of $57.0 billion, with year-over-year growth north of 60%, driven largely by data center business. This powerful showing, along with management's upbeat outlook, helped assuage some AI bubble fears immediately upon release. But markets later struggled to hold on to gains amid awareness that AI revenues remain concentrated in a handful of names.

Whether the economic cornucopia is seen as half-empty or half-full, investors may want to consider using this season of reflection to adjust their expectations and diversify their portfolios with allocations to real assets that are less tied to short-term equity market drivers and more grounded in long-term stability and value.

Portfolio considerations

Despite a superficial similarity, there's zero connection between the idiom "buy the farm" and the financial suggestion "invest in farmland." The first is a metaphor for mortality, while the second may breathe fresh life into a portfolio.

Farmland historically has been an effective and consistent hedge against inflation, a key consideration, with the Consumer Price Index (CPI) at 3.0% in September, the most recently available reading. Since 1970, per data from the TIAA Center for Farmland Research at the University of Illinois, the rolling three-year average correlation of U.S. farmland returns to CPI was +0.73. (Statistical correlations range from -1.0 to +1.0, or perfectly negative to perfectly positive, with 0 representing no correlation.) This led the asset class to outperform CPI by an average of 6.5% per year over the past six decades (Figure 2).

Meanwhile, the volatility of farmland returns (as measured by standard deviation) during the same multidecade period was 6.8%, significantly lower than the 16.6% for U.S. equities (S&P 500 Index). Additionally, the correlation of returns between farmland and U.S. equities was negative (-0.30), and between farmland and core U.S. fixed income only modestly positive (from +0.15 to +0.31, depending on the specific sector within the Barclay's U.S. Aggregate Bond Index). We believe these long-term correlation trends will continue, meaning an allocation to farmland should remain a good portfolio diversifier.

Lastly, farmland looks particularly compelling because it provides basic necessities, with demand for the goods it produces likely to remain resilient regardless of the economic environment. The asset class has weathered recent macro disruptions such as the Covid pandemic, global trade disputes, the Russia-Ukraine War and the Fed's aggressive inflation-fighting monetary policy from 2022-2023.

Longer holding periods strengthen farmland's advantages, as its correlation to inflation rises and its correlation to equities turns more negative - underscoring the value farmland offers as a strategic long-term investment.

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