Farmland: Historically High Returns, Low Volatility, And A Critical Role In The Global Economy

Compared to other real assets, farmland has long been neglected by most investors. Historically, the agriculture sector has been extremely fragmented, with the majority of farms in the US being small and family owned. This, as well as other barriers to entry, have kept farmland out of reach for many.

However, technology-enabled investment platforms are now making farmland accessible to individual investors. With historically high returns, low volatility, and a critical role in the global economy, there are many reasons why investors might want consider an allocation of US farmland.

Farmland has historically been overlooked by institutional investors and individuals

Even today, the US farmland sector remains fragmented. Small family farms dominate the landscape in both sheer numbers and in acres operated. For many years, this fragmentation led institutional investors to overlook the sector. They were also deterred by other barriers to entry, including difficulty valuing farmland assets, a shortage of knowledgeable investment professionals, and a lack of familiarity of the investment benefits of farmland.

Source: Nuveen

Since the early 2000s, however, demand for farmland among institutional investors has exploded. In 2005, there were less than 20 farmland-focused investment funds globally. This began to change following the 2008-2009 financial crisis, as more money began flocking to safe haven investments like farmland. By 2020, the number of funds specifically focused on farmland had ballooned to 166.

Despite this influx of institutional capital into the sector, barriers to entry including large check sizes, opaque valuations and lack of a transparent marketplace continued to keep farmland out of reach for individual investors. However, technology-enabled investment platforms like FarmTogether are changing that. These platforms give individuals access to fractional shares of high-quality farmland investments curated by experienced investment professionals. Read on to learn more about why that is good news for your portfolio.

1. Farmland is uncorrelated with other major asset classes and good for diversification

Diversification is critical for reducing portfolio volatility and building wealth over the long term. In a traditional 60/40 portfolio, investors split their investments between stocks and high-quality bonds. There is no need for diversification to stop there, though. Many investors are increasingly turning to alternative investments to provide additional diversification, including collectibles, commodities, cryptocurrency, real estate or farmland.

A major advantage of farmland is that it is uncorrelated with other major asset classes such as stocks, bonds, real estate or gold. This means that adding farmland to your portfolio decreases overall portfolio volatility.

Source: FarmTogether

2. Farmland is a low-volatility asset

Compared to many popular assets such as stocks, cryptocurrency, or commodities, farmland is an extremely low-volatility asset. Between 1992 and 2020, the NCREIF Farmland Index had a standard deviation of 6.9%. In comparison, the volatility of the S&P 500 was 17.1%. Farmland was also less volatile than publicly traded REITs (18.3% volatility) and privately owned real estate (7.4%). In terms of volatility, farmland was much more comparable to high-quality US bonds.

Source: FarmTogether

Low volatility is good news for long-term investors. Volatility can lead to impulsive selling in the short term and eat into overall returns over the long term. For this reason, farmland offers a solid alternative to many more popular investments.

3. Farmland offers strong real returns

A third attractive characteristic of farmland is the strong returns it offers. As the chart above illustrates, farmland returned an average of 11.0% per year between 1992 and 2020. In comparison, the S&P 500 returned only 8.0%. When considered on a risk-adjusted basis, farmland outperforms the stock market by a wide margin.

Another attractive feature of farmland is that it provides investors with two distinct income streams: price appreciation when the underlying asset is sold and periodic rental and crop payments. This passive income makes farmland stand out from other traditional inflation hedges like gold that don’t offer investors income on an ongoing basis.

4. Farmland investing is a hedge against inflation

Farmland also provides investors with an effective hedge against rising inflation. Farmland has historically been closely correlated with CPI, making it an extremely effective hedge against inflation. The value of farmland is underpinned by its critical role in the global economy: the country’s growing population needs to eat. In addition, high-quality farmland has scarcity value, as the supply of arable land in the United States shrinks gradually each year.

Periodic crop payments also protect investors from inflation. As CPI rises, the price of commodities tends to rise as well, thus giving investors a natural hedge against inflation. This correlation is illustrated in the chart below. Returns from appreciation were relatively constant over time, while income return fluctuated in line with CPI.

Source: Financial Samurai

Farmland as a Vehicle for Positive Change

Investing in farmland offers the potential to drive positive environmental and social change. The global food and agribusiness sector is a $5 trillion industry, with over 50% of the earth’s habitable surface dedicated to agriculture and more than a billion people employed across its value chain. As a result, increasing the sustainability of agricultural practices can have a significant impact on the planet.

Farmland investments can contribute to advancing sustainable farming practices, which are essential for addressing climate change and promoting long-term environmental stewardship. By supporting sustainable agriculture, investors play a role in reducing the environmental footprint of food production and fostering a more resilient agricultural system.

Many farmland investment opportunities now prioritize sustainability standards, ensuring that capital is allocated towards properties that adhere to responsible land management practices. These initiatives help farmers transition to more sustainable farming methods, which can be costly and challenging, especially for smaller operations. As a result, farmland investors can be a critical part of the broader effort to create a more sustainable future.