Why farmland and the stock market do not move together

In the spring of 2020 something odd happened in plain sight. Factories were idle, unemployment was climbing, and companies were cutting the dividends they paid to shareholders. The major stock indexes, meanwhile, sat close to where they had traded the year before. Three things that people often treat as one thing were visibly out of step: the real economy, the prices quoted on an exchange, and the cash a business actually hands back to its owners.

That gap is worth understanding, because it explains a lot about why farmland is a different kind of holding from a share certificate.

Three numbers that should agree, and often do not

An index level is a price. It reflects what buyers and sellers will pay today for a claim on future earnings, discounted back to the present. When central banks cut interest rates, that discount shrinks and the same future earnings are worth more on paper. Prices can rise even as the underlying businesses shrink, because the arithmetic of valuation changed, not the factory floor.

The real economy is a different measure: output, employment, what gets made and sold. It can contract while prices hold.

Dividend income is a third thing again. It is the cash a company chooses to pay out, and it can be cut at the board's discretion when conditions turn. After the 2008 financial crisis, dividends across large companies fell sharply and took years to recover. A share price recovering tells you little about whether the income from that share has.

So anyone who reads the index and assumes the income behind it is intact has confused three measures that only sometimes line up. The 2020 episode made the point unusually clearly.

Real assets answer to a different question

A productive farm is not a discounted claim on quarterly earnings. It is a piece of ground that grows a thing people eat. Its output depends on rainfall, temperature, soil, the age of the trees, and demand for the crop. It does not depend on the level of a discount rate set in a central bank meeting. That is the basic reason agricultural land and listed equities do not rise and fall in lockstep.

This is the older idea behind holding real assets at all: tangible things with intrinsic value tend to respond to forces that are partly independent of the financial cycle. A barrel of oil, a building, a hectare of orchard: each has a use and a physical scarcity that exists whether or not the market is open that day.

Food is the clearest case. When supply chains seized up in 2020, governments treated the food supply as a priority to protect, not a discretionary line to cut. People keep eating through a recession. That steadiness of demand is a feature of the crop, and it does not depend on any forecast.

A farm's harvest is set by the season and the soil, not by the level of a discount rate.

Why a perennial tree crop is its own case

Within agriculture, a tree crop like avocado behaves differently from an annual row crop. You do not replant every year and take whatever the spot market gives you. You plant once and live with that decision for decades, which changes the economics in two ways.

The first is the lag. A new orchard does not produce on demand. With modern nursery stock, a grove typically yields its first commercial crop around the fourth year and approaches full bearing somewhere in the range of eight to twelve years, depending on site, variety, and management. That delay is a real barrier. You cannot answer a price signal this season by planting this season; the trees decide when they are ready.

The second is where the fruit can grow at all. Avocado wants a narrow band of climate, altitude, and water, and a relatively small set of regions does most of the world's production. Suitable land is finite and slow to bring online.

Put the two together and you get a supply side that cannot sprint to meet demand. Demand, meanwhile, has run one direction for two decades. The OECD and FAO project avocado production reaching about 12 million tonnes by 2030, roughly three times its 2010 level, and expect avocado to become the most traded major tropical fruit over that period. A demand curve that compounds against a supply side held back by geography and a multi-year planting lag is the structural feature worth sitting with.

What this is, and what it is not

None of the above is a prediction about any price, and it is not a claim about what any holding will do for an owner. It describes how three measures can pull apart, market prices and the real economy and the income behind them, and why a perennial farm crop sits outside the machinery that drives them apart.

That is the educational point, and it is the same one Francisco set out in 2020: before you assume your sources of income all move together, look at what each one actually answers to.