Why Legendary Investor Michael Burry Doubled Down On Farmland

Michael Burry is doubling down on investing in farmland.

What is one of the hottest and underappreciated assets on Earth this decade?

Is it Zoom (ZM), which skyrocketed 500% this year?

Or perhaps it’ll be Amazon (AMZN), the king of stay-at-home names already up 72% this year.

Surely it must be Moderna (MRNA) or Pfizer (PFE), leaders in the mad rush to develop a COVID-19 vaccine?

Dr. Michael Burry has a different answer.

“Hold on,” you’re thinking. “Who is Michael, and why should I care?”

You and everyone else would have said the same before the 2008 financial crisis.

When he saw early warning signs that the global economic bubble would burst, Burry shorted the housing market. Burry’s legendary short of subprime mortgage loan CDO’s made hundreds of millions for his investors, and his name ascended to prophetic status through the book and film “The Big Short.”

Dr. Mike Burry as played by Christian Bale in the 2015 film, “The Big Short”

Now, Dr. Michael Burry is focusing on a new asset: farmland.

The Strongest Asset in a Bear Market – Dirt

Burry told Bloomberg, “I believe that agricultural farmland – productive agricultural land with water on site – will be very valuable in the future… I’ve put a good amount of money into that.”

The Huffington Post, Forbes, Seeking Alpha, The Motley Fool, and other respected financial media outlets have nodded to Burry. His rotation into farmland and water makes a lot of sense in today’s environment.

Burry isn’t alone in his line of thought. The smartest investors on Earth have quietly accumulated farmland assets.

Farmland’s negative correlation to many traditional investment vehicles helps explain why the world’s brightest investors  are flocking to it. 

Warren Buffet, as a prime example, famously bought a 400-acre plot of farmland in 1996. Buffet claimed in 2014 that “28 years later, the farm has tripled its earnings and is worth five times or more what I paid.”

Over the next three decades, the UN forecasts the global population to increase to about 10 billion. How do you imagine farmland investments will benefit from an over 30% increase in mouths to feed? Good luck feeding two billion people with Bitcoin or gold nuggets.

Where we are today:

The housing market around the world is looking insanely overextended. Home sales cracked a 14-year high in the USA even as home prices are less affordable than ever.

In the UK, house prices surged to an all-time high.

Australia’s “booming” housing market is a dumpster fire waiting to happen. Meanwhile, their leaders are telling everyone to keep calm and buy more houses.

Do you see a pattern emerging here? Unlike buying a home, farmland is the opposite of a liability. It’s an asset that appreciates over time while also producing a steady income.

Farmland is the only real estate type that can provide peace of mind whether you’re in the middle of a recession or the top of an overheated (and artificial) bull market.

If history indeed rhymes and real estate prices crash all over again, investing in farmland may be the Big Hedge of a lifetime.

If you want a permanent winner, there’s no asset quite like farmland.

As Covid fades, companies that surged thanks to lockdowns will likely come down to Earth. The writing is already on the wall– smart money is searching for safer places to park their assets. Calling the US stock market “toppy” is putting it lightly.

Retail investors beware, there is way too much dumb money in growth stocks today, and that never ends well.

Meanwhile, the World Bank expects agricultural production will need to balloon about 70% by 2050. Can we say the same for Peloton (PTON) stationary bikes?

From family offices to pension funds, there is a growing interest across the board for farmland investments. Yet, it’s still a drop in the bucket, especially when you consider the massive change of hands we expect to see in agricultural landholdings in the coming decades.

You’re not going to find returns like that in the growth sector or “COVID stocks.” With the global economy slowing, the much-anticipated rotation into “value” is looking lackluster.

Is Farmland a Good Investment Today?

Dr. Burry weighs in: “I’m interested in finding investments that aren’t just simply going to float up and down with the market…The incredible correlation that we’re experiencing – we’ve been experiencing for several years – is problematic.”

And here’s what investors are missing:

  • Far less competition

When you consider the importance of agricultural land, it’s surprising to learn how informal and disorganized the sector truly is. As of 2016, 0.5% of total global farmland has an institutional investment. Most farmland globally is privately-held as small family farms.

Despite its potential, farmland is significantly undercapitalized. 

However, the pace is picking up. Institutional investment in farmland is growing 8-10% each year. From 2005 to 2017, the number of Food and Agriculture (F&A) funds blossomed from 38 to 446, with their cumulative AuM topping $73 billion.

  • Traditional investing strategies are failing.

The classic 60/40 portfolio split between stocks and bonds is falling apart as the Fed holds rates near zero for the foreseeable future. Fund managers are increasingly allocating funds to riskier investments, and that’s not something you want in a portfolio when you’re close to retirement age.

  • Less alpha in fewer places, with no uncorrelated assets within sight

Some people are going all-in with Gold, Silver, and industrial metals like copper. Others are betting the family cow on Bitcoin (BTC) and crypto-assets. But none of these give you the peace of mind and bug-out option that physical land does.

Other investors look to China, the only economy that has managed to grow in 2020. However, China’s economic picture is not as rosy as it seems, and they are currently the world’s largest agricultural importer.

Agriculture will need to become more productive in the future. 

Farmland, as an investment asset class, has historically outperformed stocks and bonds with double-digit annual returns for the past four decades and without much volatility.

“We could enter into a market where losing nothing is the best-performing asset,” says Phil Toews, chief executive of Toews Corp., which manages $1.9 billion in assets. A real asset like farmland, which at worst preserves your capital, makes a strong case with an outlook like that.

Should You Invest in Water?

We can’t talk about Burry and not mention his predictions about the water market.

Burry likes almonds. Why?

The almond tree gulps five liters of water per seed, and if you haven’t noticed, health nuts (pun intended) are crazy about almond milk. Heck, I haven’t bought animal milk in almost seven years.

Logically, Michael Burry bought up farmland real estate in regions with enough natural water supply to feed a thirsty almond tree.

“What became clear to me is that food is the way to invest in water,” Barry told The Intelligencer (nymag.com). “That is, grow food in water-rich areas and transport it for sale in water-poor areas. This is the method for redistributing water that is least contentious, and ultimately it can be profitable, which will ensure that this redistribution is sustainable.”

You can also invest in the iShares Global Water Index (TSX: CWW) to gain exposure to the rising demand for water. However, Barry’s strategy is more future-proof. Owning water-rich farmland has more than a few benefits over investing in a broad derivative like an Index.

Global water demand will increase by 20% to 30% by 2050, most of which will go toward agriculture. However, the FAO estimates that about 30% of land on Earth is suitable for rainfed agriculture.

Agricultural import-dependent countries like China are already experiencing a dire water crisis. With all these facts before us, it’s clear where the market for water and agricultural land with cheap and easy access to water will go.

And that ties in closely with our top pick for the best region in the world to invest in agricultural real estate today.

Colombia has more significant rainfall overall than any country on the planet. Further, their agri-business sector is enormous, and in the process of formalization.

Global precipitation. Colombia has some of the highest annual rainfall averages of any country on Earth. 

Having lived in nearby Peru for most of 2020, I’ve seen the enormous wasted potential due to a lack of formalized labor and infrastructure. Colombia’s pushing ahead of its neighbors with both formalization and infrastructure advancements, and the economic value they’re tapping is tremendous.

Bottom line:

The most obvious selling point of farmland over other alternative assets, other than its productive potential, is that they’re not making any more of it. The demand for arable land is infinitely rising.

It doesn’t take a genius like Dr. Michael Burry to realize what happens when demand drastically outstrips supply in farmland.

Further, due to the extreme demand for water, arable land with easy access to regular rainfall comes at a premium to end all premiums. Despite all that, agricultural investments in emerging economies like Colombia remain affordable, highly profitable, and mostly untapped by large capital.


Tagged with: