Most investors are familiar with commercial real estate as an alternative investment that provides portfolio diversification and supplemental income. However, you may have noticed a different kind of real estate gaining traction lately: Farmland.
By “farmland,” we mean land used to grow row crops (think corn, soybeans, and wheat) and permanent crops (like fruit, nuts, and wine grapes), as well as other types of agricultural land like timberland. The total value of farmland in the U.S. exceeds $3 trillion.
Farmland is arguably one of the best alternative assets you can invest in, historically outperforming not just other real estate types but most other investment asset classes. And when economic disturbances like inflation or recession loom large, its track record looks especially strong.
Let’s take a look at why more investors than ever are adding farmland to their portfolios.
1. Favorable Supply and Demand
Farmland is a hard asset that produces a crucial resource: The food commodities that comprise our daily diets. Commodities have long been viewed as a strong investment alternative with powerful diversification benefits.
Last we checked, the world’s population was still increasing and with it, our need for a secure food supply. At the same time, arable land is decreasing worldwide, due largely to development.
Thus farmable acres are as crucial as the food they produce, pointing to strong land values in the long term. (Investing in farmland can actually be a way to preserve it and contribute to a resilient food system.)
2. Strong Return Profile
Source: NCREIF, Bloomberg, Bankrate, NYU Stern School of Business, Federal Reserve Bank of St. Louis, and AcreTrader calculations. All returns are estimates and assume reinvestment of dividends. Data is for the period 12/31/1990-12/31/2020.
Consistent positive returns are one of the best kept secrets of farmland investments. According to the NCREIF index, farmland has generated returns of 10-11% per year for the past 30 years (which is as long as they’ve been recorded).
Those returns are made up of two components:
- Land appreciation, the rate of which has hovered around 6% per year for 50 years, according to USDA data
- Income from production on the land. How and when that income is generated depends on the type of land (annual rental payments from a row crop farmer, cash flow from intermittent timber harvests, etc.)
Yes, that means many farmland owners are receiving a yield on their investment. In short, farmland can also play a key role in a passive income investing strategy.
Farmland has historically shown a host of appealing diversification properties, including:
- Low volatility: Farmland returns haven’t dipped below 0 in at least the past 30 years (when national records started being kept), swinging at most between larger and smaller positive returns. Compare that to gold, a classic go-to for wealth preservation, which has seen losses as steep as 30% or more at certain points.
- Non-correlation: Farmland tends not to correlate with other, more liquid common assets like stocks and bonds. In fact, there’s very little evidence that farmland and stock market prices influence each other at all. Case in point: When the S&P 500 fell more than 30% in 2008, farmland saw a 16% return.
- Strong risk vs. reward: Farmland has historically shown a better risk-adjusted return than even AAA bonds, which many investors seek out specifically for their low risk: 11% vs. 6.2% between 1991 and 2018, according to data from Bloomberg and the Federal Reserve Bank of St. Louis.
Why Farmland Now?
Frankly, because the future’s uncertain. We’re all feeling the squeeze of rising inflation and a possible recession. All of farmland’s strengths outlined above have held true during historical periods of economic trouble.
For one, farmland has stayed positive and held its value even during the downturns of recent history.
Source: FRED Economic Data, NCREIF, AcreTrader
Second, it tends to track closely with inflation, with farmland values rising in tandem with inflation measures.
Source: U.S. Bureau of Labor Statistics, USDA, AcreTrader
This performance has distinguished farmland as a superior asset class, tested by history.
Investing in Farmland Is More Accessible Than Ever
Large investors like college endowments and pension funds, as well as ultra-wealthy individuals, have for decades turned to agricultural land for wealth preservation, stability, and passive income. But for most everyday investors, farmland has been inaccessible due to the high cost of entry and the burden of farm management.
But new avenues are opening up. AcreTrader is a farmland investing platform that brings you professionally evaluated farm and timber offerings with more accessible investment minimums and an easy, secure online process.
The information above is not intended as investment advice. Past performance is no guarantee of future results. Investing in alternative assets including farmland involves risk, including risk of loss. For additional risk disclosures regarding farmland investing and the risks of investing on AcreTrader, please see individual farm offering pages as well as our terms and conditions. AcreTrader is not affiliated with Alto and the views expressed in this guest post are those of the author and do not reflect any recommendations, representations or advice by AltoIRA. Investors are solely responsible for all investment decisions when using Alto self-directed IRAs.
Zoe Buonaiuto, Investor Relations Manager
AcreTrader Investor Relations