Claudio Chisani breaks down different vehicles and strategies to get exposure to its inflation-hedging potential
As the world continues to grapple with the COVID pandemic and its market-warping consequences, Canadian investors and advisors are grasping for ways to inflation-proof their portfolios. And one promising strategy, according to Claudio Chisani, is to invest in U.S. farmland.
“Farmland represents a very useful and finite resource; you cannot manufacture it, and you cannot import it. And it also fulfills the critical human need for food,” says Chisani, who is the Principal at Chisani Wealth. He is also a Portfolio Manager at Credential Securities, and an Investment Advisor at BlueShore Wealth.
“Given the growth of the global population, you can only hope that farm operators would be able to use modern technology and science to use farmland more productively down the road,” Chisani says.
Going beyond storage value
While physical assets such as gold and real estate might be decent stores of value, Chisani argues farmland in the U.S. makes for a more practical inflation hedge. Aside from the price of U.S. land itself, he says investors in farmland may also get additional inflation protection from agricultural commodities such as corn, soy, wheat, and dairy, whose prices also go up with inflation.
“Unlike urban properties, you can’t build farms vertically,” he adds. “So with every acre of farmland you use up, the remaining area becomes much more valuable.”
The most direct exposure a typical investor can get to farmland in the U.S., Chisani says, is by investing in a farm-focused REIT, like Farmland Partners Inc. or Gladstone Land Corporation. Those REITs, he says, invest directly in farmland and lease them to farmers who’ll be in charge of operating them. And aside from offering diversification across a wide geographic area, they provide easier liquidity compared to having a physical land investment.
“There's no steep entry point where you have to spend $100,000 to get a piece of the action,” he says.
Next on Chisani’s list are crop production companies. There are few publicly traded companies that are purely focused on crop production, and many of them are vertically integrated, engaging not just in planting, growing, and harvesting the crops, but also in processing, packaging, and distribution. Those who are comfortable getting indirect exposure may also opt to invest in farm-supporting companies that produce fertilizers, farm equipment, and other goods and services that enable farm operations.
ETF-based strategies
“Agricultural ETFs are good vehicles to gain diversified exposure to the sector, though they may not invest in 100% pure-play farming businesses,” Chisani says. “They do have at least a 50% weighting toward purely agricultural businesses. One example is the VanEck Agribusiness ETF, listed as MOO, which invests in companies that derive at least 50% of their revenue from agriculture.”
In the same vein, investors who want diversified exposure but not through an ETF may invest in agriculture mutual funds. The Fidelity Global Commodity Stock Fund, FFGCX, and the North Square Oak Ridge Global Resources and Infrastructure Fund, INNNX, are two examples. Similar to ETFs, they may not offer 100% pure farm business exposure, but the companies they hold have at least 50% exposure.
Investors may also focus downstream by investing in exchange-traded products that track specific agricultural commodities. They could invest in the actual commodities, like the Barclays iPath Bloomberg Sugar Subindex Total Return ETN, with the symbol SGG, or the Teucrium Corn Fund, eponymously listed as CORN. They may also invest in a fund that tracks a basket of commodities, like the Invesco DB Agriculture Fund, DBA.
“Once you're talking about commodities and future contracts, you're dialing up the risk significantly. I would say investing in any single commodity is almost like investing in a technology stock, in that there’s a lot of volatility,” Chisani says. “Unless someone has a strong view on whether coffee or sugar should be seeing a near-term surge in the next year or so, I’d recommend they invest in a basket rather than individual commodities.”
For those with the means to invest in a high-minimum, low-liquidity asset with a lengthy investment horizon, directly investing in U.S. farmland might be the most ideal option. But those investors, Chisani says, will have to also consider the implications of having to convert their Canadian dollars into U.S. dollars as they purchase the land. There are also potential tax and estate implications, as the U.S. generally imposes taxes based on where an asset or business is located rather than where the owner or operator is.
“For anyone looking at investing directly in U.S. farmland, I would strongly recommend having a discussion with their investment advisor, as well as a tax advisor and estate planner,” Chisani says.
