Update:
I originally wrote this blog post on May 29. I knew things were bad at that point, but now they are worse. Unfortunately, my predictions are coming true. Now is the time to buy managed farmland so that you can make money on inflation and throughout the coming recession.
- The May CPI came in at 8.6%, the highest since 1981.
- To make matters worse, the PPI jumped to an incredible 10.8%. Remember, the PPI reliably forecasts what consumer prices will do in the coming months!
- Finally, food costs climbed another 1.2% in May, bringing the year-over-year gain to 10.1%.
Inflation is clearly not “transitory” as current U.S. Treasury Secretary and one-time Federal Reserve Chairman Janet Yellen claimed last Fall. Not only is it at the highest level in over 40 years, but it is also continuing to rise at a rapid rate that will have the U.S. and the rest of the world in double-digit territory very soon.
Economists will tell you that inflation is the increase in the amount of money and credit. The classic definition of price inflation is too much money chasing too few goods. In other words, rising prices aren’t technically called inflation; rising prices are a result of inflation. Frankly, the subtle difference doesn’t make any difference to me when I’m spending more than $85 to fill my gas tank when I was paying half of that a year ago.
Governments would like you to think that price inflation will ease off by the end of the year. Don’t you believe it. Remember, the U.S. government spent six trillion dollars in an attempt to fight COVID-19 (much of which was wasted), and now the result is rampant price inflation. That’s pretty much the story the world over.
Inflation is a stealth tax… you pay more for everything while the government pays back its obligations in dollars that are worth less. On top of the government’s profligate spending, supply problems resulting from logistical dislocation, trade wars and actual wars are all adding fuel to the fire.
If April’s Consumer Price Index of 8.3% (the annualized core price inflation rate) weren’t bad enough, the Producer Price Index, which measures prices paid by wholesalers, spiked 6.2% for the 12 months ending in April. That was twice what economists expected. The Producer Price Index is a general indicator of what is yet to come when goods hit the retail level. In other words, the worst is yet to come.
Oh – did I mention the fact that both indices exclude food and energy? That’s right; two of the items that make up a huge part of the average household budget aren’t even counted! The price inflation rate for food is consistently trending up as well. Food prices were 8.8% higher in March 2022 vs. those in March 2021. The U.S. Dept of agriculture has increased its food inflation rate forecast almost every month this year.
But wait… there’s more!
Yeah, just like the late-night infomercials… there’s more.
Normally the central banks, including the Fed, would raise interest rates to cool the economy and lower inflation. They have already begun that but the economy is also beginning to pull back. The U.S. economy shrank at a 1.4% annualized rate in the first quarter, which is a dramatic reversal of last year’s numbers when the economy expanded by 6.9% in the fourth quarter. Raising interest rates will only serve to exacerbate the problem. What is the Federal Reserve supposed to do now?
As I have repeatedly said to anyone who would listen, the Fed’s quantitative easing over the last 14 years has left the monetary regulator with no tools left to assist an ailing economy. If this downward trend leads to the next recession, as many leading economists including JP Morgan and Deutsche Bank are already predicting, the fed has to choose between tanking the economy or slowing the rise in prices.
Exacerbating the problem is that Congress will continue to spend money like a drunk who just got his paycheck. That continued expansion of the money supply through deficit spending will add further pressure to the nascent inflation fiasco.
Fight inflation or boost the economy? Fortunately, that’s not a dilemma that you and I face. Instead, we need to be thinking about how to capitalize on inflation both now and in the future.
Managed Farmland Is an Inflation-Beating Investment
Food production is the ultimate hedge against inflation and it all starts with buying into the game. And guess what? If you are growing those limes, oranges, strawberries, mangos, dragon fruit or avocados that you see on the produce aisle, you’re cashing in on the increase in prices. Your investment is making money on inflation.
Precious metals – gold in particular – are often touted as the answer to inflation. And it’s true that gold typically goes up in value as inflation soars. What most people don’t know is that farmland actually outperforms gold. Not only does the underlying value go up with inflation, but you have passive income from the sale of your crops that also goes up with inflation.
Farmland has historically outperformed the Nasdaq, gold, traditional real estate and the S&P 500. If that didn’t grab your attention, how about the fact that farmland has an overall lower risk than traditional investments or that farmland has steadily increased in value year-over-year?
The simple fact is that the value of farmland and the value of the crops produced are both inflation busters for their owners:
- Food prices have an inelastic demand curve. Eating isn’t an option. No matter how high prices get, people still need to eat. It’s not like buying a new car or TV; you can’t wait for prices to drop next year.
- Rising world populations are pushing demand. Worldwide demand for food is expected to increase by 70% by 2050. As much food needs to be produced in the next 40 years as the past 10,000 years combined.
- The middle class is growing in most emerging economies and this segment of the population now wants more and higher-quality food.
- Regardless of the reason, the climate is changing and the soil degradation that has taken place in the last couple of centuries will make food scarcer in the future. Farmland owners stand to profit as scarcity yields increased prices for their crops.
Granted, food investments aren’t as sexy as gold or tech sector stocks, but the value proposition is significantly better.
Now is the time to add managed farmland to your portfolio. Buy your farm now and enjoy your first harvest check in as little as two years.
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