Farmland Investing vs. Bonds

Both farmland and bonds are considered low-risk investments that offer potential long-term stability and reduced volatility. While there are similarities, farmland investments tend to offer higher returns, benefit from inflation, and experience less price fluctuation compared to bonds.

In this article, we’ll explore the role of bonds and farmland in a portfolio, highlight their differences, and examine why farmland may be a viable alternative to bonds for certain investors.

The Role of Bonds in Your Portfolio

Historically, bonds have been a preferred option for investors seeking to mitigate volatility. For example, during the 1980 recession, bonds increased by over 21% while equities dropped 16.5%. However, in more recent market downturns, bonds have been less reactive. Between January 2007 and February 2009, equities fell by nearly 51%, but bonds only rose by 6%. In 2020, while equities dropped 19.57%, bonds increased by just 1.2%.

10-Year T-Bill, Dow Jones, and S&P 500 Annual Performance — 2005 - 2021

The Pros of Bonds

Bonds provide your portfolio with several benefits, including:

• Guaranteed returns: Fixed-rate bonds provide a guaranteed payout upon maturity.
• Lower volatility: Bonds are typically less affected by short-term market movements.
• Inflation protection: Treasury Inflation-Protected Securities (TIPS) can offer inflation-adjusted interest rates.
• Negative correlation with stocks: Bonds have historically performed better when stocks decline, providing portfolio balance.

The Cons of Bonds

Bond investments have their limitations. Here are some potential drawbacks to consider:

• Lower returns: Bonds generally offer lower returns compared to equities.
• Inflation risk: Non-inflation-protected bonds may see reduced purchasing power in high-inflation environments.
• Timing risk: Buying bonds before interest rate increases may result in missed higher returns.

The Role of Farmland Investing in Your Portfolio

Farmland has been gaining traction as an investment, particularly since the 1960s. Institutional and high-net-worth investors have historically favored farmland due to its stability and potential for long-term growth. Interest in farmland surged after the 2008 financial crisis, with the number of farmland-focused investment funds growing significantly.

Farmland investments provide access to agricultural commodities, such as grains and livestock, offering exposure to a sector that is vital to global food production. Farmland's appeal lies in its potential to hedge against market volatility while delivering steady returns over the long term.

The Pros of Farmland Investing

There are a host of potential benefits of farmland investing. Some of the most common include:

• Competitive returns: Historically, farmland investments have delivered stronger annual returns than bonds, with farmland averaging 7.8% compared to Treasury bond yields of 1.52% in 2021.
• Low market correlation: Farmland has shown low correlation with both bonds (-0.24) and equities (-0.06) over the last three decades, meaning farmland investments may not be significantly impacted by market trends.
• Long-term value: The demand for food is expected to double by 2050, potentially driving up farmland values due to its limited supply.
• Variety of options: Farmland investments vary in crop type, geographic location, and target hold periods, offering flexibility to investors.

The Cons of Farmland Investing

Farmland investing isn’t without its drawbacks, of course. It might not be a fit if:

• Accreditation requirements: Direct investments in farmland are often limited to accredited investors.
• Long-term focus: Farmland is a long-term investment, particularly for permanent crops, and may not offer immediate returns.

Comparing Farmland and Bonds

While both farmland and bonds offer stability and lower volatility, there are key differences in terms of returns, risk, and investment structure.

Historical Returns

Bonds and farmland both have, for the most part, a stable history of positive performance. As shown below, farmland has generally outpaced bonds in terms of annual performance, with fewer fluctuations in value over time.

Farmland Price per Acre versus 10 Year T-Bill Interest

Source: USDA ERS, FRED

Even during downturns, such as the 2008 recession, farmland maintained its value better than bonds.

Farmland Value vs. S&P 500 and DJIA Annual Closing Price — 1990-Present

Risk and Volatility

Both bonds and farmland are known for being relatively low-risk investments. When assessed through the Sharpe Ratio (which measures risk-adjusted returns), farmland (1.21) has historically outperformed bonds (0.59), indicating a higher return for each unit of risk taken.

Market Correlation

Farmland and bonds tend to have a low or negative correlation with the stock market, making them useful for diversification. Farmland, in particular, has demonstrated a low correlation with both equities and bonds, making it less susceptible to broader market fluctuations.

Investing Options and Ways to Invest

Bonds offer a range of investment options, including corporate bonds, municipal bonds, and T-bills, each with varying risk levels and interest rates. Conservative investors may prefer Treasury bonds, which can be purchased directly or through brokerage accounts and ETFs.

Farmland investing offers options like fractional ownership and real estate investment trusts (REITs). Fractional ownership allows investors to hold a direct stake in farmland, while REITs provide exposure to farmland without direct ownership. Fractional ownership behaves differently from REITs, which are more subject to market fluctuations.

How to Choose Between Farmland Investing and Bonds

Both farmland and bonds serve as long-term investments that can provide portfolio stability and diversification. However, the current economic environment may offer greater upside potential with farmland, as bond yields remain relatively low. Farmland’s returns vary depending on the crop and region, but they have historically ranged between 2% and 14%, offering a diverse set of opportunities for investors.

Ultimately, the right choice depends on your individual investment strategy. Bonds may suit investors seeking conservative, fixed returns, while farmland could be a more appealing option for those looking for long-term growth, inflation protection, and diversification.