Farmland vs. The S&P 500
Although the percentage of Americans who own stocks has dropped over the past 30 years, it is by far the most significant investment market, with 56% of Americans today owning stocks. At the end of 2021, the total value of all U.S. public equity totaled $53 trillion. Of this, $42 trillion was concentrated in the largest 500 companies.
On the other hand, farmland is not a publicly-traded investment, besides a handful of agriculture commodity ETFs. This lack of accessibility is primarily due to the fact that most U.S. farms, nearly 97%, are currently family-owned. Additionally, the nationwide supply of farmland is continually decreasing due to real estate development and climate change, making high-quality land that much more scarce.
Because of these underlying differences, among others, between these two asset classes, there are some intriguing contrasts to what equities and farmland have each historically provided investment portfolios.
Let's dive into the history of each asset class, how each has performed historically, and where the two assets fit into a well-rounded portfolio.
A History of Stocks and Farmland
The stock market dates back over 400 years when the first stock exchange was created in Amsterdam, the Netherlands. In the United States, stock history began in 1792 when 24 stockbrokers signed the Buttonwood Tree Agreement on Wall Street, eventually forming the New York Stock Exchange. Over 100 years later, in 1896, the Dow Jones Industrial Average was formed with just 12 companies. Though the S&P 500 was formed in 1923, it didn't develop into a popular, large-scale index until 1957. Fast forward to the present, and there are roughly 6,000 publicly traded companies in the United States.
However, the origins of agriculture date back around 10,000 years, with evidence of the first domesticated crops found in Asia. In the United States, commercial agriculture exploded in 1935, primarily driven by federal programs, though the quantity of farms has since dropped to roughly 2 million farms today. While institutional firms have been investing in farmland since the 1970s, farmland has been largely out of reach for individual investors until recently.
However, despite farmland investments being historically inaccessible, the total valuation of all farm sector assets in the United States is expected to increase to $3.31 trillion in 2022. This growing value has presented a massive opportunity for investors over the last several decades.
Investment Performance of Stocks and Farmland
While stocks take up a majority of nearly every investor portfolio, this doesn't necessarily mean that they are the best investment option. In fact, farmland has historically outperformed the S&P in many areas, from stability to diversification.
In recent history, both equity and farmland returns have been impressive. From 1992 to 2020, the equity market posted an annual average return of 7.87%. These returns have been even more impressive over the last decade; the 10-year average annual stock market return from 2012 through 2021 was 14.25% (returns averaged 26.9% in 2021 alone). Though often riskier and historically more volatile, small-cap stocks have recently outperformed other equities, generating returns more than twice as high as large-cap stocks over the last five years.
As an income-generating real asset, farmland generates returns through distributions from the sale of crops and capital gains from the underlying land value at the end of the hold period. From 1992 to 2020, farmland generated an average return of 10.84%. These returns depend on the crop type; for instance, from 2000 to 2020, permanent crops yielded an average return of 14.2%, outperforming row crops with an average return of 10.6%. Land values, on the other hand, are primarily driven by location. However, land values nationwide have experienced upticks over the last several years – including an increase of 7.0% in property value in 2021.
Although the composition of the S&P 500 has continually evolved, the index's standard deviation since 1992-2020 has been 16.89%. The stock market is known for its ups and downs, particularly evident during the pandemic. The S&P 500 swung more than 3% 34 times from February 2020 to June 2020, a level of volatility similar to the 2008 Financial Crisis. In 2022, the market began as volatile as ever; on January 24th, 2022, the market erased a 4% intraday decline to close even higher that same day – only the 6th time in history it's completed that feat.
On the other hand, farmland has historically been a much less volatile asset. Farmland's stability is due mainly to the asset's vital role in our society; people will always need to eat. Thus, prices tend to remain stable. Between 1992 and 2020, farmland's average standard deviation was 6.84%, less than half of U.S. stock volatility during the same time frame.
A well-balanced portfolio typically includes both stocks and bonds. However, given that both stocks and bonds depend on macroeconomic conditions, these two asset classes have recently developed a positive correlation, meaning a traditional portfolio of stocks and bonds might not diversify a portfolio as strongly as it used to. In fact, from 1992 to 2020, equities had a positive correlation with U.S. bonds, private real estate, and U.S. REITs.
Historically, farmland has been uncorrelated with equity returns; in fact, from 1992 to 2020, farmland was negatively correlated with both U.S. stocks and U.S. bonds. As mentioned above, this is because farmland returns are not tied to broader financial markets and, therefore, tend to perform independently of traditional asset classes. Farmland returns have more closely mirrored private real estate, as the positive correlation between these two classes over the last 30 years has been 0.45. Farmland also has a historically strong correlation to inflation; farmland returns are roughly 70% correlated with the CPI and more than four times stronger than gold's historical correlation to inflation.
Both stocks and farmland have the potential to deliver passive income. Passive income from stocks is paid through dividends, often issued quarterly. Last year, companies within the S&P 500 paid over $500 billion in dividends - a record high in total dollars paid. However, with equity prices higher than ever, the dividend yield of S&P 500 stocks dropped to 1.3%.
Farmland can offer investors passive income through farming operations, as well as through lease or rental payments if a third party operates the farm. Since 2000, farmland has generated positive annual operating income returns, including a 14.5% year-over-year increase in net cash farm income in 2021. Meanwhile, rental prices have increased; in 2021, the average rate to rent cropland was $141 per acre. Rental prices are heavily contingent on the location of the cropland; for example, the average rent for cropland in California is $331, while the average rent for Arizona is $325. Cash flow dividends from digital farmland investments usually mirror the underlying operations and harvest schedule. FarmTogether's cash distributions have historically occurred quarterly, bi-annually, or annually.
Two Diverse, Accessible Options
From telegrams to telephones to open outcry exchanges, stock investing has substantially evolved over the past 200 years. A single, simple equity trade that used to require multiple phone calls now takes seconds. Today, fractional trading platforms make it possible to own shares of any public stock, and the introduction of mobile trading applications has made equity investing even more accessible and popular.
The alternative investment industry also has a history of high barriers of entry, low transparency, and a lack of accessibility. Leveraging the same fractionalized ownership technology, innovative fintech platforms, like FarmTogether, have democratized the alternative investment space.
Two Complimentary Investment Options
Historically, both equities and farmland have contributed to investor portfolios in unique ways. Stocks, while more volatile, are typically more accessible and can earn higher (or lower) yields in a shorter amount of time. Meanwhile, farmland has historically provided investors with stable, strong returns while offering greater passive income opportunities. While it's likely your portfolio already contains equities, consider the differences between stocks and farmland when deciding whether this real asset investment can diversify your portfolio.
Interested in learning more about farmland as an asset class? Click here to see farmland's historical performance, visit our FAQ to learn more about investing with FarmTogether, or get started today by visiting ways to invest.
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.