Transcription
Hello and welcome to the VPath introduction series. Uh, today's topic is a brief overview of what are the key macro drivers for farmland and at Farmland, the Farmland return behaviors.
So, first of all, it goes about saying that population growth is a is a critical Farmland return driver. Um, every person, um, on the planet requires a certain amount of calories, and those calories are invariably produced by agricultural land, whether in the form of agricultural plant commodities or whether those are used as inputs for protein production. And so, if you look at the, the trends in global population, um, it's the, we're expected to have an increase of about 2 billion people from 8 to 10 billion by 2050. That's a 25% increase in global populations. Despite the fact that, you know, population growth rates are, are tending to slow in the, in the developed world, that isn't the case in the developing world. And so, we're still experiencing quite rapid population growth, and of course, that at the margin is a return driver for farmland.
Another very powerful macro driver for farmland, um, is the change in economic demographic. And what I mean by that is, as people become middle class, and, and that is increasingly the case globally, they tend to consume more animal proteins. And the multiplier effect of feeding animals can mean that when someone transitions from a lower income diet to a middle income diet, they may as much as double their crop consumption because of the multiplier effect of, of the type of animal protein they consume. And so, we're expecting, just in this decade alone, an additional 1 billion more people in of middle class status, going from 4 to 5 billion people of the global population. So, it's a very large impact on agricultural commodity demand.
And finally, um, the another very material driver for Farmland returns is the stagflation inflation thesis. Um, if you look at farmland's behavior, um, in stagflation and/or inflation, you can see that it materially outperforms. And when you step back, the reasons for that should be quite obvious. I mean, farmland is a very unique, non-depleting, commodity producing capital asset. In fact, it's probably the only non-depleting commodity producing asset on the planet. An oil well depletes to zero, a uranium mine depletes to zero, a copper mine depletes. And also, some commodities can be recycled. That's not the case with farmland. Properly maintained, it's non-depleting, it lasts forever, and all of its production is consumed. And therefore, farmland is discounting the production of an infinite series of commodities within elastic demand. People don't change their dietary behavior based on a recession, and low stock to flow meaning there's not a lot of agricultural commodities in storage. So, the reason farmland tends to materially outperform in periods of inflation or stagflation is because of these characteristics. It's a hard asset, so it likes the inflation piece, and it's resistant to economic stagnation because in a recession, people don't change their dietary behavior.
And so, you think about at the, you know, at the margin, what are the big powerful macro drivers for farmland, you know, over the, over the long term, over the medium to long term? It's population growth, middle class growth, and now, as we seem to be entering a period of stagflation in the developed world, the stagflation component.
So, this is just a visualization of, of, of what I mentioned. You can see the population growth going to 8 billion to 10 billion. It's a 25% increase. It's a very material impact on, on agricultural commodity demand because there is a new farmland. Um, middle class growth, once again, 20% increase just in this decade alone. That can double crop consumption for each person that makes that transition. Um, you can see the average all-in diet for a develop, for the in developing world, when you factor in protein and the multiplier effect, is about 5,000 crop calories. And when you move to a developed world diet, it may be as much as 9,000 crop calories if that additional protein is beef. And then let's talk about stagflation and, and, and inflation and, and visualize it because I think the visualization is helpful. This chart is the 1970s, which was the, this is sort of the, the last bout in recent financial history or modern financial history of, of stagflation. And you can see some fairly pronounced, um, data points here. The stocks, bonds, and real estate did not outperform inflation. You can see them along the bottom of the chart. And in fact, there's a misconception in the financial community. Stocks, bonds, stocks, and real estate hedge low levels or predictable levels, non-volatile levels of inflation extremely well. A very good inflation hedge. But stocks and commercial real estate do not hedge high levels or volatile, you know, levels of inflation. High inflation, it drops, it goes up. They hedge that very badly.
Now, if you look at farmland over that 1970s period, you can see that it, it materially outperformed. It was a very asymmetrical payoff to inflation. A very small allocation of farmland, as as little as 10% in this period, would have hedged all your downside risk of your stock, bond, and commercial real estate holdings. So, think of it as just portfolio insurance for stagflation. And in Western Canada, in fact, farmland went up 400% approximately nominal terms during that bout of stagflation inflation, but 275% in real terms. So, it provided a lot of protection against these macro conditions, and in fact, it outperformed. You generated very high real rates of return at the end of the decade.
So, thank you for listening in. Uh, there is a much longer, um, presentation with much more detail, but the idea of these, um, short videos is to just give you a quick introduction. So, I, I recommend you look at the others that are available in the series, and thank you for your time.