Farmland's Superior Performance Over The Past 30 Years
In recent history, the United States economy has weathered multiple recessions, battled against inflation, and fought economic uncertainty. With the last three decades behind us and a wealth of information now at our fingertips, let’s look back at how farmland investments have performed over the past 30 years.
The NCREIF Farmland Total Return Index has increased more than 5x over the past 15 years, 10x over the past 20 years, and 20x over the past 30 years. However, farmland hasn’t always been the best performing investment. Excessive subsidies caused agricultural overproduction during the 1990’s. During this time, the S&P 500 annual average return of 17% outpaced farmland returns of 12%.
Over the next decade, farmland outperformed its competitors as equities and bonds were largely impacted by both economic recessions of the 2000’s. During the first ten years of the new millenium, farmland averaged annual returns of 14%, while the S&P 500 averaged a slight annual loss. The S&P 500 dropped to 49% off its all-time high during the dot com crash, while farmland generated returns of 7%. Farmland investments also posted positive returns and outperformed United States treasuries, the Dow Jones, and the S&P 500 leading up to, during, and after the 2008 financial crisis.
After the 2008 recession, commodity prices performed exceptionally well. In 2009, corn had a market year average price of $3.55 per bushel. Just three years later, harvests received an average $6.89 per bushel. This led to exceptional operating income growth in farms, increasing almost $70 billion from 2010 to 2011. However, during the last decade, the S&P 500 has once again outperformed farmland. Though the volatility of the S&P 500 has been twice as high as farmland investments, investors have been rewarded with 3.5x increases in S&P 500 holdings and only 2.8x increases in farmland holdings since 2010.
U.S. farmland has traditionally not been a volatile asset. From 1992 to 2001, farmland investments posted 72 consecutive quarters of positive returns. It wasn’t until a minimal loss of 0.1% in Q4 2001 (during a recession) that farmland investments finally posted a quarterly downturn. Farmland investments went on another tear from 2002 to 2019, posting positive quarterly returns every quarter until Q4 2019. Again, it could only be stopped by economic uncertainty due to COVID-19 that farmland farmland investments declined. Though it posted another loss of only 0.1%, the S&P 500 declined by 19.8% over the same timeframe.
From 1992 to 2020, the average volatility of farmland investments was 6.84% - lower than the S&P 500’s volatility of 16.9% or gold at 14.8%. Between 2000 and 2019, private farmland investments posted income returns of at least 4% every year - including a 15-year span of operating income returns of at least 5%. Since 2007, farmland has never reported annualized volatility greater than 10%. In comparison, the S&P 500 spent all of 2009-2013 with greater than annualized volatility of 10%. Even 10-Year United States Treasury bonds have spent considerable time in double-digit volatility over this period.
Correlation With Other Investments
Farmland has traditionally been considered a great asset for diversification as it isn’t strongly correlated to many other investments. This has been especially true during recessionary periods. From Q3 2000 to Q1 2003, the S&P 500 posted a cumulative loss of 42%, while the NCREIF Total Return Index posted a gain of 14%. Similarly, the S&P cumulatively lost 46% during the 2008 financial crisis, while the NCREIF Index increased 17%. Overall, since 2000, the S&P has posted negative returns in 28 different quarters - in 26 of these quarters, farmland posted positive returns.
It makes sense that farmland does have some correlation to other real asset investments. Since the 2008 financial crisis, farmland investing has posted positive correlation returns to only real estate and timberland. During this time, farmland investing has posted neutral or negative correlation to domestic equities, emerging markets, and gold. Farmland indices have also shown to be negatively correlated to bond indices.
Inflation vs. Returns
Farmland has traditionally been considered a strong hedge against inflation. In the years leading up to the turn of the century, farmland had a very strong relationship to changes in the CPI. Because inflation held steady during the early 2000s and agricultural returns still increased, the correlation between the two would appear to have weakened. However, with the recent return of increased money supply, the United States economy reported annualized inflation of 5.3% in August 2021. Although agricultural manufacturers reported labor and transportation costs increased 7.9% during this time, corn and soybean prices increased 60%. In general, farmland has performed exceptionally well during inflation periods. Over the last half century, farmland returns during periods of high inflation are 14.7% - more than double the average inflation rate.
Resilience to Economic Cycles
During the three recessions of the 20th century, farmland investments generated average annual returns of 5.3%, 6.7%, and 15.8%. During both downturns in 2000 and 2008, farmland investments outperformed the Dow Jones, S&P 500, and gold. In the years immediately after the 2008 financial crisis, farmland outperformed all traditional asset classes except gold. Farmland went relatively unharmed during economic turbulence starting in 2019. As the S&P 500 dropped 37% from February to April and the 10-Year Treasury Bonds dropped to record lows, farmland continued posting positive returns.
With only 7% of Earth’s land suitable for cultivation, farmland values have typically appreciated due to its scarcity. In 1992, the United States had an estimated 2.11 million farms. Ten years later, the number of farms had only grown to 2.16 million. Price appreciation was modest during the turn of the millennium as farmland valuations increased between 2% and 4% each year between 1994 and 2004. In 2005, the residential housing boom peaked, and commodities also experienced large price increases. Farmland valuation benefited from both as evidenced by an average valuation growth of 16% in 2005 and 11% in 2006. It wasn’t until 2008 that farmland valuations dropped for the first time in 20 years.
After the 2008 recession, farmland began rising in value again. The 2.4% value appreciation in 2015 was the smallest rate of growth since the recession, and cropland valuations held fairly steady with modest growth over the past several years. It wasn’t until 2021 that prices began to spike again, as the USDA reported land value increases of approximately 7% for the year through August 2021. Compared to other real assets, farmland valuation has appreciated more rapidly. The median home value in the United states in 1990 was $79,100. Fast forward 30 years, the median home value is $334,000 - an increase of 322%. Alternatively, the nominal value of farmland real estate was $683 in 1990 and $3,160 in 2020 - an increase of 363%.
Three Decades of Success
It’s been an economically intriguing last thirty years, and farmland has demonstrated its value as a diversification, hedge, and revenue-generating asset. It’s provided investors with strong, consistent returns with low volatility. Farmland has also performed comparatively well during recessions or periods of high inflation. Regardless of what the future has in store, farmland is poised to continue being a reliable, consistent investment opportunity.
Disclaimer: FarmTogether is not a registered broker-dealer, investment adviser or investment manager. FarmTogether does not provide tax, legal or investment advice. This material has been prepared for informational and educational purposes only. You should consult your own tax, legal and investment advisors before engaging in any transaction.