Commodities Versus Farmland: Where Will Investors Find The Greatest Long-Term Gains?

Asset managers are scrambling to find alternative investment opportunities as equities keep crumbling because of the persistent macroeconomic headwinds. Moreover, the better-than-expected U.S. jobs report released yesterday indicates that the Federal Reserve might remain on track to raise interest rates in the coming months, hurting stocks further. This, coupled with the historic weakness in stocks witnessed in September, has driven fund managers and investors to look for better alternatives. 

Outperforming Commodity Market 

The commodities market outperformed benchmark equity indexes earlier this year as the Russia-Ukraine war and worsening supply chain crisis resulted in severe raw material shortages in various countries. In addition, the West has been largely accusing Russia of weaponizing major commodities, including food grains and oil as a response to the harsh economic sanctions. This comes as Russia has substantially reduced oil exports to Europe and curbed food supply exports from Ukrainian ports across the Black Sea. 

As a result, major commodities, particularly oil and groceries, witnessed an immense price surge earlier this year. Goldman Sachs expects this trend to continue, as it estimates the S&P GSCI commodity index to rise 38.8% over the next 12 months. Also, Goldman Sachs strategists expect the energy sector to deliver more than 50% returns over the next year. 

Farmland: Greater Potential For Long-Term Gains

While Goldman Sachs analysts are betting on the commodity market to remain strong, several raw material prices have begun plunging as the global economy grapples with the threat of a recession. Oil prices fell more than 2.5% last week alone amid a slowdown in Chinese manufacturing activity. 

Farmland, on the other hand, is poised to deliver better-than-expected returns over the long term, thanks to the rising global demand for food. For instance, Productive Iowa Row Crop Farm, specializing in corn and soybeans, delivered 23.3% returns, beating the 8.5% estimate. Also, California’s East Highline 160 farm, which primarily produces alfalfa and carrots, delivered 15.4% returns versus the 8.8% estimate. As the world population continues to grow, demand for basic food supplies will remain strong, ensuring high farmland investment returns.

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