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Category: Insight

Going, Going, Gone! Is Inflation Running Away with our Money and our Investment Returns?

Written by Ailie Carlene Elmore

On the field that is the U.S. economy, currently loading the bases are looming interest rate hikes, the value of the U.S. dollar, and rising Treasury yields. On the mound, is Federal Reserve Chairman, Jerome Powell, and everyone from investors to consumers are waiting to see what will happen next with monetary policy and the economy. Early in the game, the COVID-19 pandemic threw a curveball, and ever since, the economy has been dribbling a series of weak grounders from persistent unemployment, to supply chain disruptions and a declining labor force participation rate. Will Chairman Powell toe the rubber to strike out runaway inflation and imperil economic growth or is the US economy in for extra innings?

How did inflation get so out of hand?

The U.S. Bureau of Labor Statistics reported that in January 2022, the consumer price index rose 7.5% from January 2021, the highest rate of inflation since February of 1982. Some of the industries seeing the largest price hikes are the energy, gasoline, housing, and food sectors which is of no surprise for anyone who has bought groceries or visited the gas pump lately. Even with the rise in prices, it hasn’t generally stopped consumers from spending. The Commerce Department reported that retail sales are up 3.8% year over year with large gains reported in vehicle, furniture, and building supply purchases. Home sales have been on the rise as well with the National Association of Realtors citing that home sales in January were up 6.7% from the previous month. This comes as home buyers are trying to secure financing at lower interest rates before the anticipated Federal Reserve rate increase next month.

Source: SpringTide US. Inflation Trends

While this level of inflation is unlike anything Americans born after the 1970s and early ‘80s have ever experienced, many economists are not surprised by this spike in the CPI. The federal government has shelled out more than $3.5 trillion in COVID-19 relief funding in the form of stimulus checks, unemployment compensation, and the paycheck protection program. The figure below shows the allocation of this spending with more spending earmarked through 2030 as the government continues to combat the aftershocks of the pandemic. The excess liquidity in the market, combined with the supply chain disruptions and labor shortages, has created the perfect cocktail for inflation to brew. While this spending was necessary to keep the economy out of a recession, some argue the federal reserve hasn’t been aggressive enough in unwinding its pandemic era policies to combat rising inflation. The Federal Reserve has announced that rates will start to rise in March, but by how much? Experts, such as economists at Citibank, are predicting anywhere from a 25 to 50-basis point hike with the later end of the spectrum becoming more likely as inflation rises. They are then expecting three to four more 25-basis point hikes by the end of 2022. Economists feel this could help slow inflation by the end of the year, but supply chain disruptions and incipient wage inflation risk still loom.

Source: CNBC analysis of Treasury data compiled by the Pandemic Response Accountability Committee

Is 2022, the new 1980?

The survivors of the last battle with inflation in the 1970s and 80s know all too well what runaway inflation looks like.  It has some questioning whether we are in for a blast from the past in 2022. Inflation peaked in 1980 at 14.8% and while we haven’t hit those levels yet, the jump we have experienced has people on their toes for a line drive heading for them. Inflation in the ’80s was driven by a variety of factors from unpredictability in interest rates to soaring oil prices. Most economists believe that this time is different than the 1980s as recent inflation has been caused by COVID-19 aftershocks of excess liquidity and supply chain issues. These factors are expected to normalize over time.

Examining our Investment Strategy

Markets have been off to a shaky start in 2022 with inflation and geopolitical risks in Russia & Ukraine driving the recent volatility. Economists and investors worry that if war broke out between Ukraine and Russia, it could cause more supply chain disruptions of commodities which could prolong inflation. While the Federal Reserve’s announcement of a March interest rate increase has curbed some concerns about more inflation, these new geopolitical risks could overshadow efforts to reduce inflation through monetary policy. As a result, investors are watching markets closely in addition to exploring inflation-protected physical assets such as gold or farmland. Below is the historical correlation between several asset classes and the consumer price index using returns data from 1970-2020. The CPI has historically had a positive relationship with bonds and precious metals but a negative relationship with equities.

Source: Data supplied by the TIAA Center for Farmland Research

Physical assets such as precious metals and farmland have taken center stage the past few months with gold values up 5.3% year to date and farmland values up 22% in parts of the Midwest since this time last year. While these physical assets have been investors’ go-to during high inflationary periods in the past, investors have also been allocating more of their portfolios to cryptocurrencies as well. Cryptocurrencies have a relatively short history compared to traditional assets which makes it difficult to analyze their performance with inflation, however, some investors are calling it “digital gold.” Even Mr. Wonderful, Kevin O’Leary, claims that his portfolio has more holdings in cryptocurrencies now than gold. Crypto enthusiasts cite its ability to be shielded from the effects of government money printing and spending largesse.

Servant Financial has been keeping tabs on inflation and has updated its investing strategy accordingly based on investors’ risk tolerance. While we are still allocating a portion of portfolios to equities and fixed income instruments, we’ve had a higher portfolio tilt towards allocation to precious metals, real assets, and Grayscale Bitcoin Trust (BTC) as protection for client portfolios from inflation. INFL, Horizon Kinetics Inflation Beneficiaries ETF, has recently been added to the portfolio as well. It is an actively managed ETF designed to capitalize on growing inflation trends. Currently, INFL has $896 million assets under management with holdings in transportation, financial exchanges, energy and food infrastructure, real estate, and mining companies. While INFL has a diverse group of global holdings, its top holdings are in PrairieSky Royalty (Oil & Gas), Archer Daniels Midland (Food & Agribusiness Processing), and Viper Energy Partners (Oil & Minerals).

While inflation has threatened investors’ portfolio returns, an adjustment in investment strategy for the purposes of inflation hedging will help investors score in the performance game in the later innings of this economic cycle. A watchful eye must be kept on key economic signals such as changes in interest rates, inflation trends globally, and the supply chain normalization. If you would like to discuss your asset allocation so you can do well in all facets of the investment game like the alert and observant Willie Mays, the Say Hey Kid (Say who. Say what. Say where. Say hey.), contact Servant Financial today.

Through the Looking Glass – Investment Themes to Watch in 2022

Written by Ailie Carlene Elmore

The world has been riding the COVID-19 rollercoaster for the past two years. Similar to Alice’s adventures in Through the Looking Glass, the twists and turns of the pandemic have been reflected in our everyday life and the investment world. Financial markets have experienced extreme highs and lows as the market digested economic data and expectations about COVID-19 cases and incoming variants. Even the map of S&P 500 levels mimics a roller coaster you might see at your favorite theme park. Despite the economic and social volatility over the past two years, the S&P 500 returned more than 26% in 2021.

Graph of S&P 500 levels January 2020 – December 2021

So where will Alice go next in the looking glass? Specifically, what should investors be reflecting on as we look towards 2022? With this in mind, we have identified a few opportunities as well as some things to watch in the investing world in the upcoming year. More details will be provided on these topics in the upcoming months however investors should be aware of these opportunities and market risks as we start the year.

Inflation

 

One of the greatest market concerns early on in 2022 is rising inflation levels. From food in the grocery stores to gas at the station, the price of everything is going up. The U.S. Labor Department recently reported that consumer prices rose 7% in December 2021 from the price level in December 2020. This comes after November 2021 consumer prices rose 6.8%.  A Wall Street Journal survey showed that respondents believe inflation levels will come down gradually in 2022 as a Federal Reserve interest rate hike is expected in early 2022 in response to inflation well above its 2% target and a low unemployment rate of 3.9%. Survey respondents also are projecting economic growth to slow in 2022 to a 3.3% increase in GDP which is significantly lower than their October expectations of 4.2%. As a result of these economic drivers, investors are flocking to real assets such as farmland, commodities, and precious metals.  Commodities, including energy, and precious metals are the top-performing sectors so far in 2022. Nationally, farmland experienced a 7% increase in values in 2021, and agricultural commodities and farmland are projected to continue rising in 2022. If you are interested in investing in farmland coupled with tax benefits, learn more on Promised Land’s website.

Wall Street Journal Survey Report

The Next Gold Rush

 

The rise in inflation expectations also has some investors seeking protection in physical assets such as Gold. Gold is another asset that has been known to offer investors inflation hedging potential however the volatility in the COVID-19 pandemic caused great volatility in the gold market in 2022. Based on our Q4 data, gold was down close to 4% year to date in 2021 but was up 5% in the fourth quarter of 2022, demonstrating increased interest in the asset class with rising inflation concerns. Some investors think gold will start to shine in 2022 as the market digests negative real yields in the face of potential runaway inflation numbers. Analysts from Australian Bank, ANZ, expect gold prices to rally in the first half of 2022 but will come back down later in the year after the expected interest rate hike from the Federal Reserve. Meanwhile, another historical catalyst for gold, geopolitical risks, are on the rise in Ukraine and Russia, Taiwan and China, and domestically due to COVID-19 policies.  While the jury is still out on whether the next gold rush will emerge, it is an investment theme we are keeping our eye on going into 2022.

Image from the Gold Rush of 1849. Will we see history repeating itself in 2022?

Cryptocurrency

While the economic results of the COVID-19 pandemic have some investors looking backward to seek inflation protection, others are wondering if a cryptocurrency investment has a portfolio role in the investing looking glass. Crypto has had a varied history and is known to be one of the most volatile assets.  However, its use as an alternative store of value and currency (“digital gold”) has been attractive for some investors seeking shelter from potential Federal Reserve money printing and other monetary policies supportive of risk assets. The cryptocurrency market has started 2022 on poor footing with Bitcoin falling more than 7%  on January 21st. This comes after global concerns from emerging regulations on cryptocurrencies in Russia, one of the largest crypto-mining markets. Will this rocky start send Bitcoin tumbling down into a digital mineshaft? Goldman Sachs remains optimistic about Bitcoin’s potential, citing that it thinks the price could double in the next five years, stealing some of gold’s luster in the process. The crypto story will continue to unfold in 2022 and we will be keeping watch with “laser eyes.”

Environmental, Social, and Governance (ESG) Investing

Every day, more and more investors want their investments to not only grow in profitability but also spark positive change in the world around them. The demand for environmental, social, and governance (ESG) investing grew substantially in 2020 with a record 140% increase in investment funds going towards ESG investments. In 2021, investor demand grew further with companies across the planet trying to meet investor preferences through sustainable business practices and policy actions to reduce their carbon footprint. Northern Trust Corporation’s ESG index fund (Ticker: ESG) which invests in large-cap companies promoting sustainability and social governance is up more than 14% from January 2021 to January 2022, with its outlook looking strong. Its $186 million assets under management include a diverse mix of industries such as technology, health care, and renewable energy. As young millennial investors enter the stock market, many believe impact investing will be at the forefront of their minds and their pocketbooks. ESG investing is paving the way for new roads in the market such as carbon investing, green bonds, and clean energy development. We plan to discuss this topic further in the coming months and provide opportunities to put your dollars to work for a more sustainable planet.

Grow your wallet and your planet with ESG Investing

The Looking Glass

“It’s a great huge game of chess that’s being played – all over the world- if this is the world at all you know” – Lewis Carroll in Through the Looking Glass. These words of Carroll from more than 150 years ago still hold in life, especially in the geopolitical and investing realms. From inflation and interest rate concerns to safe-haven capital flows to gold and ethically directed demand for ESG investments, investors must actively survey the chessboard and potentially modify the strategy to win the game. 2022 is sure to challenge us tactically with blockades, decoying, and double attacks. Servant Financial will use a stable, yet flexible looking glass by investing your capital with integrity, compassion, and experience. Follow us as we reflect on these and other topics in the coming year.

Organic Agriculture: Fad or Durable Trend?

Written by Ailie Carlene Elmore

Background on Organic Agriculture

Walking down the aisle of the grocery store, a shopper can find a variety of different food labels attempting to win their attention such as “No Added Sugars”, “Gluten-Free”, or “No Artificial Dyes or Flavors.” More recently, labels such as the one below have been popping up in grocery stores across the U.S.

 USDA Organic Seal

It used to be that organic products were only found in select stores that specialized in organic or sustainable food products, but more and more organic products are going mainstream and can be found in big-name grocery stores such as Walmart, Costco, and Target. In fact, Walmart, is the #1 seller of organic products offering more than 400 different organic products. That figure surprises some people that expect traditional specialty stores such as Whole Foods or Trader Joes to dominate the space, but the market share of Walmart outpaces both of these popular organic store chains.

But what actually constitutes a product as organic? While this definition could be different based on who you ask, the Environmental Protection Agency defines “organically grown” as food that is grown and processed without synthetic fertilizers or pesticides. However, natural pesticides that are derived from animals, plants, bacteria, or minerals are allowed. Organic production has been taking place in the United States since the 1940s but it started to gain steam in the 1970s as consumers demanded more environmental awareness and became increasingly concerned about how food was grown. In 1990, Congress passed the Organic Foods Production Act to develop national standards around organic production in both livestock and crop production. The National Organic Program which is a marketing program managed by the USDA aims to create and monitor uniform standards around organically produced products to aid consumers in their decision-making.

Drivers for Organic Products

Organic sales currently account for more than 4% of total U.S. Food Sales and that number is projected to continue rising in the future. Total sales of organic products grew 31% from 2016 to 2019 domestically and are projected to grow at a compound annual growth rate of 10% through 2025. The dominant organic product in the U.S. market is fruits and vegetables with large growth in 2020 in the pantry stocking and meat, poultry, and fish sectors.

Organic sales are on the uptick with sales reaching $56 billion in 2020.

While there are a variety of factors driving organic food demand such as environmental or health concerns, the largest reason is consumer preference and affordability. Historically, organic products cost anywhere from 10-50% more than conventional products. When it comes to one of the U.S. largest agricultural exports, corn, the price of organic corn is more than double its conventional counterpart. Organic production is more costly for producers.  In addition to higher seed and land costs, producers face a costly 3-year transition period in the land to become certified organic. During this time, the land must be “cleansed” of any conventional pesticides or fertilizer. Once a farm is deemed USDA certified organic, the returns are considerably higher than conventional methods for corn and soybeans in particular. The table below from the USDA presents data that shows that although organic production costs are higher than conventional costs, the higher prices received for organic crops more than offsets the higher production costs for corn and soybeans.  The same can also be said for organic meats and produce however there is less widely available information about those markets.

While the costs of organic production are higher, this is offset by higher prices received.

After investigating the returns to organic production, you might ask, why aren’t more farmers producing organic products? The biggest hurdle for farmers is the three year transition period and capital expenditures needed to become organic. The three-year transition can cause a financial hit to producers that can be difficult to recover from. Another difficulty for organic producers is the lack of infrastructure in the organic industry. Unlike, conventional products like corn and soybeans, there is not a centralized market such as an exchange for organic products to be bought and sold. Organic products often require more specialized handling and storage and there are not as many facilities able to handle these needs. While government policy is working to change this, there is much work to be done in this space if the U.S. is to meet its own domestic demand for organic products.

Investment in Organic Agriculture

An investment in organic agriculture could be attractive for investors not only in investment performance but also may fit their preferences to actively support environmental, social, and governance (ESG) standards. Many organic companies share these beliefs and would seek to leverage capital from ESG investors to transform and grow the organic marketplace and infrastructure. Investors looking to capitalize on organic investing have a variety of options. They could invest in the common stock of companies selling organic products such as WhiteWave Food (WWAV) which owns 4.2% of the organic market share with popular brands such as Horizon Organic. In 2017, WhiteWave Food was acquired by Danone, one of the largest multinational food companies.

Another common stock option could be to invest directly in organic grocers such as Sprouts Farmers Market (SFM) which specializes in premium organic foods and performed quite well against large grocery competitors during the COVID-19 pandemic. Sprouts delivers a unique farmers market experience with an open footprint of fresh produce at the heart of the store and welcoming look and community feel.  Sprouts offers an assortment of fresh, high quality food that is sought after by its more affluent and educated consumers. Because they are able to capitalize on health and quality conscience consumer base, their profit margin is 4.5% which is strong compared to one of the largest grocery stores in the U.S., Walmart, who has a profit margin of 1.4%. Sprouts’ ESG operating focus has also impressed its stakeholders, particularly its efforts to reduce food waste by 78,000 tons.  Sprouts has an equity market cap of $3.2 Billion and trades at a reasonable 11 times trailing twelve month earnings.  Sprouts is ramping its growth plans and intends to add 300 – 400 new stores in expansion markets of Texas, Florida, California, and New England.

In last month’s article, we discussed the Promised Land Opportunity Zone Fund which provides investors the opportunity to deploy capital in farmland which has historically provided strong returns with inflation hedging capabilities. The farmland in this fund lies within an opportunity zone, providing tax benefits to investors. The Promised Land Opportunity Zone Fund is looking to deploy capital to organic conversions in opportunity zones as part of its broader opportunity zone investment in farmland. If you are interested in learning more about the Promised Land Opportunity Zone Fund, please contact Ethan Rhee at ethan@servantfinancial.com.

Another option for investment in a private fund that is more of a pure play in the production of organic food, an investor could invest in an organic farmland REIT such as the Vital Farmland REIT LLC (Fund II) managed by Farmland LP. Farmland LP’s has assets under management valued at more than $200 million across its two farmland funds, totaling close to 15,000 acres. Farmland LP earned the highest corporate sustainability rating by HIP Invest Inc. in 2021 for its ESG efforts.

For ETF investors, there are fewer options for direct organic investment however several ETFs are investing in food production and food processing. The First Trust Nasdaq Food & Beverage ETF (FTXG) has $6.4 AUM and also has a AAA rating (best) for ESG impact by Morgan Stanley Capital International. Their primary holdings are in food processors such as Bunge, Tyson, Archer-Daniels-Midland, and General Mills. These companies are all making significant strides towards increasing processing capabilities for organic products.

While organic agriculture has made substantial advances in the past ten years, this emerging agricultural sub-sector is still in need of capital to grow productive capacity and reach its full potential. An investment in organic food production provides for diversity of consumer preferences as well as environmental and sustainable production benefits for American farmers and farming communities. The historical and projected organic sales data and savvy investor capital flows suggest that organic agriculture is a durable trend that is here to stay.

One Up On Main Street – A Farmer’s Daughter’s Guide to Farmland Investing

Written by Ailie Carlene Elmore

Author’s Note

“This past month, I defended my master’s thesis on the Role of Farmland in a Mixed Asset Investment Portfolio. Under the direction of Dr. Bruce Sherrick at the University of Illinois at Urbana-Champaign, I explored how an investment in farmland can interact in an investment portfolio of equities, bonds, and treasuries in addition to how it can hedge against inflation. Using data maintained by Dr. Sherrick and courtesy of the TIAA Center for Farmland Research, I analyzed the returns to farmland from 1970-2020 and some of my results are discussed below in addition to introducing farmland as an asset class to institutional and individual investors.” – Ailie

Background on US Farmland

Farmland is a unique asset class in that it has a limited supply and potentially an unlimited useful life. Only 17.2% of the United States landmass is considered arable.  With a growing world population projected to reach 9.7 billion by the year 2050, farmland is well positioned as a production source for a basic human need: food. Not only is the population rising but income levels are also expected to follow suit with world GDP projected to double by 2050. These statistics suggest that demand for food is going to go up and the composition of caloric intake is expected to change. Research shows that protein consumption rises with rising income levels.  With a significant portion of farmland acres dedicated to either feeding livestock or producing other protein sources like chickpeas or lentils, farmland owners and operators are uniquely positioned to meet this demand and profit from it. So long as humanity needs food, there will be economic rewards for the cultivators and landowners.

Farm Balance Sheet

If an institutional or individual investor was investing in a company’s common stock or buying a corporate bond, they would typically examine the balance sheet of the company. The same is true for investing in farmland. Farmland has grown in value significantly over the last 50 years with a 55% increase in the last 10 years alone. Farmland (Real Estate in the table below) dominated the asset side of the farm sector’s balance sheet encompassing close to 83% of total assets. Under the recent low-interest-rate environment, farmland’s debt level has also grown but this is still significantly less than the portion of farm assets it supports. The overall low debt to equity ratio of 16.2% demonstrates a very conservative leverage position relative to other real asset sectors and the relative strength of the U.S. Agriculture industry as a whole.

Data maintained by the TIAA Center for Farmland Research based on data from the Economic Research Service, a sector of the USDA

Returns to Farmland

Like any real estate asset, farmland receives returns when held by an investor in two ways: appreciation in value and cash flow generated from rental income. In 2021, the U.S has experienced a rise in both. According to the USDA, farmland prices are up 8% from last year.  Record sales prices of farmland have been occurring throughout the U. S.’s key growing regions.

August 2021 USDA Land Values Summary

On the rental income side, most investors would be participating in a straight cash rent system meaning a farmer pays the landowner a fixed amount per year for the use of the land. Recently, the U.S. has experienced growth in cash rent values along with the rise in farmland prices.  Fueled by strong commodity prices, healthy farming profits, and appreciating land value, cash rental rates are projected to rise 10% in 2022.

To examine a longer-term horizon of historical returns to farmland, data from the TIAA Center for Farmland Research was utilized from the years 1970-2020. During this period, the average return to all U.S farmland was 9.7% with a standard deviation of 6.4%. This composite return encompasses all 50 states.   However, not all regions of the U.S. are suitable for farming or have optimal productivity. An institutional investor also has to consider that that are nine anti-corporate farming states that would make it difficult for them to invest in certain key production states like Iowa.

One way for an investor to maximize their potential returns while gaining operational efficiencies from scale is to invest in a farmland fund that provides broad diversification with farms in several key states. The Promised Land Opportunity Zone Fund (“PLOZ” or “Promised Land”) is one way for investors to capitalize on the durable returns of U.S. farmland while also receiving favorable tax benefits such as a reduced capital gain taxes depending on how long the asset is held. The government defines opportunity zones as urban and rural communities that need significant investment to foster economic revitalization. The current PLOZ portfolio is managed by Farmland Partners in conjunction with Servant Financials’ founder, John Heneghan. Currently Promised Land owns 10 properties of 8,000 acres in North Carolina, South Carolina, Illinois, and Mississippi. These states encompass some of the highest performing states in the U.S.

Using this state composite for Promised Land, the weighted average return of states represented in the fund can be used as a proxy to compare farmland returns with other traditional investments. This is done by weighting the allocation to each of the 5 states by purchase price then finding the average return of these states using the TIAA Center for Farmland Research’s data on cropland return. The return from 1970-2021 across the Promised Land proxy states was 11.1% with a standard deviation of 8.4%. Looking at the more recent term, this farmland proxy had a return of 8.2% with a lower standard deviation of 5.2%.

Note: This analysis uses USDA state-level averages to compare historical returns and does not necessarily represent the returns that an investor would achieve with an allocation to the Promised Land Opportunity Zone Fund.

Relationship of Farmland with Traditional Investments

The proxy returns in the Promised Land Opportunity Zone Fund can be compared with other traditional assets such as corporate bonds, stock indices, REITS (real estate investment trusts), treasuries, and gold. Using a risk-return plot under two different time horizons, the position of farmland as an investment can be compared with other investments. Performance metrics from 1970-2020 were examined to show farmland as a longer-term investment compared to a shorter time horizon of 2000-2020. See the figures below for full details.

Data maintained by the TIAA Center for Farmland Research.

The Promised Land OZ proxy demonstrated the highest risk-adjusted return compared to the other asset classes over both time periods.  PLOZ has the optimal position in the upper left-hand quadrant of the graph with a high return and overall lower risk compared to equities, REITS, and gold. Even in the last 20 years, the PLOZ proxy still yielded high, relative returns with lower risk.

The relationship between farmland and other investments can be further compared by examining the correlation of returns in the chart below.  A value of 1 means two asset classes are perfectly correlated and would be expected to move up or down in tandem.  A negative number suggests the two assets move in the opposite direction over time.

Promised Land’s negative correlation with stocks (S&P 500, Dow Jones, NYSE) gives reason to believe that farmland would provide diversification benefits and offset some of the volatility of these assets with high standard deviations (risk measure). In the more recent past (2000-2020), farmland’s negative relationship with stocks is even stronger with a -.32 correlation with the S&P 500. Note that when the S&P 500 dropped 48.6% in 2008 after the great recession, the Promised Land proxy maintained a positive return of 8.9%.

Relationship of Farmland with Inflation

Recently, investors have been concerned about inflation and how they will affect investment portfolios.  The Labor Department recently reported that inflation had hit a 31-year high in October with the consumer price index (CPI) rising to 6.2%. Investors and economists across the globe are wondering if we are witnessing the death of Fed’s “inflation is transitory” narrative.  Historically, stock indices have had a negative correlation with inflation and investors are concerned that these inflationary trends are long-term and secular in nature. Farmland on the other hand has historically provided a nice hedge against times of inflationary pressure. Examining the PLOZ proxy returns with CPI trends shows a positive correlation of .71, meaning historically an increase in the CPI will also increase returns to farmland. Recently this trend has held as some Midwest land is up 20% in value along with the higher consumer prices. See the figure below for more details.

Investment Opportunities

With its potential return and diversification benefits along with its track record as an inflationary hedge, farmland is positioned well to have a complimentary role in a traditional 60/40 (equity/bonds) investment portfolio. To optimize on this potential, investors have a few different options to partake in farmland investing. The most obvious option is to buy farmland directly.   However, this could be costly and comes with the requirement that the investor find capable management for the parcel. Buying a single parcel of farmland also puts the investor at more risk that comes from regional concerns like weather or farm-level (or idiosyncratic) risks like loss of production due to water or soil nutrient levels.

To alleviate some of the parcel management burden while still participate in farmland’s return and diversification benefits could be to invest in the Promised Land Opportunity Zone Fund. The fund is targeting internal rates of return between 8% and 14%, before consideration of the tax benefits it would provide to OZ investors. PLOZ’s mission is to help investors and agricultural communities achieve mutually beneficial outcomes through profitable, durable investing in farmland and the revitalization of rural American communities.  In addition to its core “opportunity zone” impact, Promised Land is evaluating other environmental, social, and governance (ESG) principles, such as farmland preservation, wetland and forestland restoration, organic conversions, and soil health and carbon management practices.  Promised Land’s vision is for these agricultural communities to prosper by feeding the world while OZ investors do well by doing good for these communities and the environment.  If you are interested in learning more about the Promised Land Opportunity Zone Fund, please contact Ethan Rhee at ethan@servantfinancial.com.

Another option for investors would be to invest in Promised Land’s partner: Farmland Partners Inc. Farmland Partners Inc. (FPI) is a publicly traded company that acquires and manages high quality farmland throughout North America. FPI manages the farmland in the Promised Land Opportunity Zone Fund as well. FPI’s current portfolio consists of 157,000 acres in 16 different states. Currently FPI’s stock is trading for just over $12 per share which is up 50% from this time last year. We believe this is an attractive entry point below the fair value of the farmland that FPI owns.   On their third quarter 2021 earnings call, CEO Paul Pittman, commented that the net asset value of the farmland was closer to $14-$15 per share. FPI has also restarted its growth and consolidation strategy.  In addition to direct farmland acquisitions, FPI is growing its asset management business with its property management arrangement with Promised Land and its recent acquisition of Murray Wise & Associates.

With the risk of secular inflation on the rise and the inherent portfolio diversification, an investment in farmland is something all investors should be considering. By including an allocation to farmland in your investment portfolio, you’ll have a much more efficient portfolio and be “one up on Main Street” investors enamored with a traditional 60/40 investment portfolio.

Rural Broadband: An Investment in Connectivity

Written by Ailie Carlene Elmore

Author’s Note

“Growing up on a farm in rural Illinois, access to internet was always a hinderance in my family’s household. The screeching sound of the dialup internet starting up was all too familiar until about 7 years ago when my family was finally able to have WIFI connectivity (wireless local area network). Even then, video streaming was still out of the question, and it would take several minutes to send an email. When my brother and I moved home in March of 2020 because of the COVID-19 pandemic, we were both finishing up graduate school then both had to start jobs working remotely in May. We needed to coordinate Zoom calls because we would easily overload the WIFI network if both of us were on one at the same time.  Even then, our internet would crash at least once a day. This is a familiar story for many rural American households that has been heightened as millions of Americans began working or learning from home due to the pandemic. Investment in broadband coverage is something that I happen to find very important if we are to be socially responsible investors.” – Ailie Elmore

Current Status of Rural Broadband

The need for digital interaction is increasingly becoming a necessity for people around the world. From working remotely, learning virtually, telehealth appointments with providers, and accessing other essential goods and services through E-commerce, the world has never been quite this connected. However, that isn’t quite true for all Americans. 22.3% of rural Americans and 27.7% of Americans in tribal areas still lack basic broadband coverage. The Federal Communications Commission (FCC) defines broadband as 25 megabits per second (mb/s) of download speed and 3 megabits per second (mb/s) of upload speed, however this continues to evolve with technological advances. For reference, the size of this article is roughly 1 megabyte which would take around .32 seconds to download with an internet speed of 25mb/s.

Unfortunately, many rural communities have been left behind in this technological advancement which has not only cost the United States socially, but economically as well. For example, many jobs have moved to remote work due to the COVID-19 pandemic, and companies have realized they can cut down on costs by not having employees come into a physical building. McKinsey estimates that remote work offerings will continue to grow as a result of the pandemic which could mean more job opportunities for those living in rural areas. However, improved access to jobs traditionally performed in an office setting only increases the demand for rural broadband connectivity.

Broadband Subscription by County in the United States.

Last month, we focused on education technology advancements that are reshaping the way we learn. However, 12 million school-aged children are left without broadband access in their home, inhibiting virtual learning potential. The COVID-19 pandemic shed light on this as these children were left without broadly available resources to complete their schoolwork. Likewise, remote employment has also been one of the positive outcomes of the pandemic, however the rural workforce struggles to keep up with the connectivity needs for video conferencing, transferring files, or collaborating virtually. The need for a digital infrastructure exists however the upfront costs for providers to initially invest becomes a tough pill to swallow. The initial cost to create a fiber network costs around $80,000 per mile which makes it difficult for companies to recoup their investment in rural areas where the population per square mile is much lower. This cost alone has disincentivized many major providers from investing in high-speed internet in rural areas.

The United States government has worked to spark growth in rural broadband through investing in broadband infrastructure. $47.3 billion was invested from 2009 through 2017 in this industry, and the USDA has invested heavily in programs, loans, and grants for rural connectivity infrastructure. In August of 2021, Agriculture Secretary Tom Vilsack announced $167 million in capital deployment for 12 states lacking access to high-speed internet in rural areas. “Broadband internet is the new electricity. It is necessary for Americans to do their jobs, to participate equally in school learning and health care, and to stay connected.” – Secretary Vilsack.

However, is this enough to bring rural America up to speed? In an analysis performed Deloitte on behalf of the USDA, they estimated an investment totaling between $130 billion and $150 billion would be needed to fully support rural broadband coverage and ensure high speed access. The U.S. government’s targeted, minimalist approach to rural broadband has left the door open for private companies to capitalize on this investment opportunity.

The Potential Economic Impact of Rural Broadband in the United States

While the need for rural broadband is apparent, it begs the question what kind of impact could investment in this space have? The USDA projects that if rural broadband enhancement was realized to its full potential, then it would boast an additional $18 billion of annual economic improvements in the United Sates. Furthermore, $1 billion in additional e-commerce sales would occur if broadband coverage was equivalent in rural areas to that of urban regions. Not only would rural broadband access improve the economic environment, but would also improve the quality of life for rural Americans. 60% of Americans who live more than 70 minutes from a physician do not have internet coverage that can handle telehealth visits. Additionally, lack of broadband inhibits peoples’ ability to connect digitally to sources of entertainment, knowledge, and social interaction.

A revitalization of rural communities could also occur if people are able to have the comforts of an urban digital infrastructure anywhere in the country from improved access to rural broadband. Improved rural internet connectivity could give people the capability to work remotely and more affordably live anywhere in America. The COVID-19 pandemic has already sparked a movement away from cities to the suburbs. Adequate investment in rural broadband could drive that movement even further away from metropolitan areas to the ex-burbs and towards the pristine, scenic mountains of Colorado, the beautiful deserts of New Mexico, or amber waves of grain of Iowa.

Not only would investment in broadband help the everyday person in rural America, but it could have substantial benefits to the agriculture industry, the lifeblood of many rural communities. Like many industries, technological advancements in agriculture have pushed the industry into digital integration. Precision agriculture has had substantial impacts on the productivity and efficiency of U.S. food production which has been driven by the farmer’s ability to connect to a digital universe. Currently, broadband is giving farmers access to a wide array of digital technologies, but the USDA projects that $47-$65 billion (Table 2 below) could be added in gross benefit to the economy if the full potential of broadband, and the digital landscape was reached in America’s heartland.

The impact rural broadband could have on the U.S. Agricultural Economy. 

Row-crop farming operations have more widely adopted precision agriculture technology but there is still room for improvement in broadband infrastructure for livestock and specialty crop production. An investment in digital infrastructure could reap substantial environmental benefits as the USDA projects an 80% reduction in chemical application and up to 50% reduction in water usage as a result of precision agriculture. The World Economic Forum estimates that if just 15-25% of farms adopted precision agriculture technology then by 2030 there could be a 15% decline in greenhouse gas emissions and a 20% decline in water usage. A reduction in water consumption like this could provide 64.4 billion gallons of water additionally to Americans every day. Achievement of these kinds of broad-based outcomes would be major milestones across many of the United Nation’s 17 sustainable development goals, particularly 2) Zero Hunger, 3) Good Health & Wellbeing, 6) Clean Water & Sanitation, 8) Decent Work & Economic Growth, 11) Sustainable Cities & Communities, and 12) Responsible Consumption & Production.

Investment in Rural Broadband

In addition to the U.S. government making targeted investments in rural broadband, many private industries are also taking part in the broadband rollout only where investment is economically viable. Cellular-based internet providers such as AT&T and Verizon offer rural broadband coverage, but internet speeds are still troublesome for many consumers. There has also been a push to deploy fiber optic internet infrastructure by several private companies. However, this option is questionable economically for lower density communities with cost estimates of up to $80,000 per mile for broadband lines. The Federal Communications Commission offers assistance through the Alternate Connect America Model to private companies building fiber infrastructure in underserved areas. Unfortunately, this assistance is again targeted as the program is usually only available for very remote areas. As a result, private investment in rural broadband is economically constrained and limited in its scope and effectiveness.

A potential champion for rural broadband deployment has recently emerged in the founder of Tesla, Elon Musk. Through his company, SpaceX, he is revolutionizing the way that internet is provided in a capital intensive, winner-take-all approach. Using low-orbit satellites that are closer to earth than standard satellites, SpaceX has launched a program called Starlink that can provide internet service at triple or quadruple standard “high speed” internet. Currently, Starlink can provide between 80Mbps and 150Mpbs in download speeds and 30Mbps of upload speeds which is close to 6 times the definition for rural broadband mentioned earlier. Starlink advertises it will be able to provide its broadband coverage to anywhere in the world.  While there is an initial consumer setup cost of $499 for a satellite and router then a monthly fee of $99, Starlink is a highly, attractive alternative to many Americans yearning for faster internet.  The estimated payback on setup costs for a rural broadband subscriber at $150 per month is about 10 to 12 months.  Musk said in May 2021 that the company had received more than 500,000 pre-orders for Starlink service.

Starlink has deployed more than 800 satellites thus far and says it still plans to launch 12,000 satellites costing around $10 billion to provide high speed internet to the masses.

Opportunities for Investment

As an industry that is experiencing rapid growth and is likely to continue to do so, rural broadband could be attractive for investors seeking to deploy capital in a socially responsible space. An investment in broadband coverage could take a variety of shapes as there are many players in the telecommunications industry. An investment in Starlink could be a particularly attractive long-term investment given its unique ability to provide high speed internet around the globe.  The resulting business moat achieved through Starlink’s highly capital intensive ($10 billion) business plan could boast substantial returns in the future if Starlink is successful in establishing their low orbit satellite network and achieve subscriber goals.  It is unlikely that another competitor will emerge with the boldness to spend $10 billion or more to compete.  A publicly available Starlink would be an intriguing pure play on the rollout and associated societal and economic benefits of rural broadband deployment.

Musk has not announced a target date for the IPO for Starlink yet, but it is projected to come in the near future.  In advance of a potential Starlink IPO, the First Trust Index NextG ETF – NXTG offers a broadly diversified play on the digitization of rural communities across the globe.  NXTG’s strategy is to invest in public companies applying substantial resources to the research, development, and application of fifth generation (“5G”) and next generation digital cellular technologies within two sub-themes of 5G: infrastructure & hardware and telecommunications service providers.  5G infrastructure & hardware consists of data center REITs, cell tower REITs, equipment manufacturers, network testing, validation equipment, software companies, and mobile phone manufacturers.  Telecommunications service providers consist of companies that operate the mobile cellular and wireless communication networks that offer access to 5G networks.

Our expectation is that NXTG would likely capitalize on a Starlink IPO when it becomes available. Currently, NXTG’s current holdings include companies developing digital technology such as Apple, Nvidia, HCL technologies, and NEC Global. NXTG’s 1 year return is just over 33% and has just over $1 billion in assets with exposure domestically and in foreign markets.

The deployment of rural broadband has the potential to provide for lasting economic and societal benefits that touch a variety of industries and rural communities left behind in the digitalization of commerce and social interaction. From an improvement in agricultural production and sustainability, to better access to health care and education, an investment in rural broadband will widely benefit mankind economically and socially and potentially achieve clients’ investing with purpose goals and objectives.

What is Education Technology?

Written by Ailie Carlene Elmore

Chalkboards, pencil sharpeners, and slide projectors: all represent old school educational tools. Today these low tech devices are being rapidly replaced by virtual reality, white boards that can record what is written, and most importantly, computers. The locus of education has quite literally changed, from a physical lecture hall to a virtual classroom in the cloud. Leading this revolution is education technology, also known as “EdTech.” Education technology combines information technology and computer software with a wide array of educational methods to foster learning and student growth. Combining tools like virtual reality and artificial intelligence with other forms of media like podcasts and instructional videos, Ed Tech is re-shaping the way people learn from ages 2 and up. The COVID-19 pandemic spurred growth within this sector and has some wondering whether this trend will continue post pandemic.

Spurred Growth from COVID-19 Pandemic

1.2 billion children around the world went from sitting in classrooms to sitting behind a computer in April of 2020. A new wave of e-learning, which uses computer assisted teaching to educate, persisted throughout school districts. Prior to the COVID-19 pandemic, online resources such as Coursera and Kaplan existed but were not as widely adopted. As teachers navigated e-learning, students and parents had to take a more self-taught approach to learning. E-learning offered students more flexibility in their learning environment and gave them opportunities to seek out more widely available resources in the digital world. As a result of COVID-19, researchers are projecting a $70 Billion increase in the e-learning investments in the next five years.

Major Players in Education Technology

There are a variety of interlocking participants within the education technology market. The government has been involved in the space since 1994 with the creation of the Office of Educational Technology within the Goals 2000 Educate America Act. As part of the United States Department of Education, it works to develop policy, media tools, and digital infrastructure to support education technology for K-12 learners. Prior, to COVID-19 there was little funding available to build an e-learning infrastructure and even post pandemic, resources are scarce particularly in rural or lower income areas.

Private industry has been eating up the opportunity to build out an education technology infrastructure and flourished even further during the pandemic. Experts predict by 2025 that there will be more than 100 publicly traded companies listed as an education or training companies with market cap’s greater than $1 billion. The ability for these companies to create cost-effective technology that can be integrated into a classroom setting or at home will be crucial to their growth. Companies such as Course Hero and Coursera help students learn a variety of subject matters such as calculus and biology through online courses and interactive platforms. Other companies such as Wondrium have capitalized on the fact that millions of Americans of all ages are seeking continuous learning experiences by offering courses in traditional university level topics such as history, economics, psychology, etc. as well as special interest topics like food, music, travel, and many more.

Education and training companies are projected to continue increased market cap growth.

While some traditional learning institutions may fight the education technology boom, many more public universities are embracing new ways of instruction and learning. For example, the University of Illinois at Urbana-Champaign has been at the forefront of investing in technology for classrooms and e-learning. In particular, through the Center for Innovation in Teaching and Learning, investments in eTexts have been made to integrate classrooms with online media. Craig Lemoine, the Director of the Financial Planning Program at Illinois, has worked to build 3 personal finance eTexts that not only can be used for student courses but eventually can be sold to private individuals or companies. “The final product matched our goal… High quality from authorship to final digital product, accessible across any number of learning styles,” said Dr. Lemoine.

Investment Opportunities in Education Technology

The market for education technology reached close to $75 billion in 2019 and is projected to grow at a 20% annual rate to $319 billion by 2027. In 2020 alone, $2.2 billion in venture and private equity capital was raised for U.S. education technology startups focused in augmented reality, artificial intelligence, and online course development. Block chain technology integration is also expected to drive innovation and investment in education technology as the academic world seeks better options for safeguarding student records and performing analytics.

Hardware development in EdTech dominants the market.

While the United States and other countries have embraced investment in education technology, it has not been as well received in China. In July of 2021, China announced regulations that banned companies from making a profit in the education sector. Particularly, companies offering tutoring services must be registered as non-profit. This caused many Chinese EdTech companies’ share prices to plummet. Domestically, investment in education technology continues to boom with no signs of similar government heavy-handed prohibition on for-profit business models.

There are a variety of options for investing in the nascent EdTech sector whether that is by investing directly in listed companies in the sector such as Chegg,Inc. (NYSE: CHGG) or Kahoot (Oslo: (KAHOT.OL). Note neither CHGG or KAHOT has yet achieved profitability.  Another new, more diversified approach to publicly listed investment vehicles in this space is Global X Education ETF – EDUT, first listed on the NASDAQ on 7/10/21. EDUT seeks to invest in companies providing products and services that facilitate education, including online learning and publishing educational content, as well as those involved in early childhood education, higher education, and professional education. This ETF’s top holdings are major players in EdTech such as Chegg, Pearson, and Zoom. As a newer ETF, EDUT has only $8 million under management today.  We will continue to monitor EDUT progress as a thematic investment possibility in education technology.

Future Implications and Growth Potential

As a challenger to traditional learning, EdTech has some people questioning if it will replace traditional learning methods. We believe EdTech will aid and augment traditional learning rather than replace it by creating more collaborative and productive learning environments that increase student engagement while increasing educator efficiency. EdTech is geared towards creating a more accessible environment for students to learn. However, many of EdTech’s benefits are highly dependent on a student’s ability to access this technology through broadband networks. Shockingly, 22.3% of rural Americans and 27.7% of Americans in tribal lands lack even basic broadband coverage.

We believe there is a high correlation between Opportunity Zones (low income communities), food deserts, and educational deserts. In the coming months, we plan to explore this overlap and devise purposeful investment strategies to improve the lives of children and families across the country. Check back next month for an in-depth analysis on investing in broadband and the opportunities it could present.

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