5 Reasons Why Farmland Investing Could Be a Strong Option in Today’s Economic Climate

As inflationary pressures continue to impact various sectors of the economy, many investors are seeking ways to protect their portfolios. While the Federal Reserve has aimed to reassure markets with inflation targets around 2%, there is still uncertainty about how prolonged inflation may affect investments. In this context, it's worth considering alternatives to traditional stocks and bonds, such as U.S. farmland. Here are five reasons why farmland might be an effective addition to your portfolio:

1. Farmland is a natural hedge against inflation

Similar to gold, farmland is often seen as a natural hedge against inflation. Historically, U.S. farmland values have shown a strong correlation with the Consumer Price Index (CPI), around 70%, largely because rising crop prices contribute to inflation, given that a significant portion of household income is spent on food.

Farmland investors benefit from two main sources of returns: income from rental and crop payments, and price appreciation when the land is sold. As crop prices rise, so do the returns to investors, making farmland a reliable inflation hedge. Additionally, higher crop prices tend to increase the underlying land value, which can lead to higher valuations when the property is sold.

Commodity prices, such as those for corn, soybeans, and wheat, have surged recently, reaching their highest levels in over six years. Amid this inflationary environment, farmland may be compelling consideration for investors looking to protect their portfolios.

2. Farmland provides attractive returns paired with low volatility

Farmland offers not only a hedge against inflation but also strong average annual returns. Between 1992 and 2023, farmland investments delivered nearly 11% average annual returns, including income and price appreciation. Over the same period, the stock market returned 10.07%, while gold, another inflation hedge, returned about 5%.

On a risk-adjusted basis, farmland looks even more attractive. Over this period, stock market volatility was 17.71%, while farmland's standard deviation was 6.61%, closer to high-quality U.S. bonds (4.67% volatility). The Sharpe Ratio, which measures risk-adjusted returns, for farmland was 1.18—higher than that for bonds (0.36), U.S. stocks (0.42), and gold (0.21).

This combination of high returns and low volatility makes farmland a reliable store of value over time. For instance, if you had invested $1000 in U.S. farmland in 1992, that investment would have grown to over $20,000 by the end of 2023.

3. Farmland offers passive income

Farmland is also a solid source of passive income. Investors receive income from rental and crop payments without needing to be directly involved in the day-to-day operations of the farmland.

Passive income has several advantages: it allows investors to build wealth without additional effort, adds diversification to income sources, and makes cash flow more resilient to financial shocks. Passive income investments are particularly attractive for retirees and those on fixed incomes, as they reduce the need to draw from other investment accounts.

4. Farmland is uncorrelated with other asset classes

Farmland investments not only provide passive income but also add diversification to a broader portfolio. Farmland has shown historically low correlation with major asset classes like stocks, bonds, real estate, and gold. This means that economic shocks affecting traditional assets may have less of an impact on farmland investments.

Diversification is a core principle of modern portfolio theory, and investing in multiple uncorrelated asset classes is crucial for reducing risk and building long-term wealth. With bond yields at historic lows and concerns about a potentially overheated stock market, many analysts suggest revisiting the traditional “60/40” portfolio (60% in stocks, 40% in bonds). Adding alternative investments like farmland can reduce volatility while maintaining strong returns.

5. Technology-enabled platforms make farmland investing easy

One of the main barriers to farmland investing in the past was its exclusivity to institutional investors and ultra-high-net-worth individuals. Historically, opaque markets and large minimum investments made it difficult for individual investors to enter the space.

Today, technology-enabled platforms have made farmland investing more accessible. These platforms offer transparency, lower minimum investments, and streamlined processes, opening up farmland investing to a broader range of investors. This makes it easier than ever to incorporate farmland into a diversified portfolio.