Is Farmland a Good Alternative to Bonds?

July 28, 2021

It seems fair to say that farmland has impressive historical returns and appears to be a conservative investment option, especially given the relative lack of leverage compared to other real estate sectors.

However, a closer look at historical price swings reveals another important variable in farmland returns: a lack of relative price volatility.

This relative historical stability may be another motivator for investors to turn to farmland as a portfolio diversification tool. For some investors, farmland may even be worth exploring as an alternative to well known lower-risk assets, such as bonds or Certificates of Deposit.

Let’s take a deeper look at the historical evidence for farmland being a relatively low-volatility investment.

Strong Returns and Lack of Relative Price Volatility

The first chart below shows farmland and other asset class returns over various time periods, indexed to 10 years, 15 years, 20 years, and 25 years.

Farmland exhibits some of the strongest return characteristics of any major asset class.

United States historically has produced consistently strong returns when compared to other various asset classes

The second chart below looks at the standard deviation (volatility) of those returns over the same time periods.

United States farmland has consistently low volatility when compared to various other asset classes

These two charts show that not only has farmland produced impressive returns over time, it has done so with far less volatility than any of the other asset classes that even come close to it in terms of returns.

Farmland Prices and Stock Prices Move Independently

Let’s examine a more specific comparison. The chart below shows relative movement between U.S. farmland (the green line) and the S&P 500, a primary equities index (the red line).

United States farmland returns are independent of S&P 500 returns and diversifies your portfolio for protection against stock market

To be statistically precise, the correlation between these two asset classes is -0.03. Said differently, there is almost zero statistical evidence that stock market prices influence farmland prices and vice versa.

Stocks’ fluctuations between positive and negative annual returns can be a deterrent for some investors looking for more stable returns.Swinging between 30% returns and 40% losses is not for the faint of heart!

Note that the swings in the green line above are a matter of how much is made each year from farmland. The returns of a farmland investment over time have oscillated between small returns and large returns, rather than between huge returns and massive losses like the stock market saw throughout the early 2000s and again during the Great Recession.

This lack of correlation between farmland and stocks suggests that farmland can be a viable portfolio diversification tool. In a world where most other asset classes increasingly move together, farmland may help mitigate the risk of financial loss in all assets at once.

Risk-Adjusted Returns on Farmland Investments

Professional asset managers often use the Sharpe Ratio to describe financial returns within the context of adjusting for risk.

The formula is rather simply defined as the excess average returns divided by the standard deviation (volatility) of those returns. A higher Sharpe Ratio implies greater risk-adjusted returns.

For some context, over the last 25 years, the Sharpe Ratio of farmland in the above dataset is near 1.4 versus the S&P 500 at 0.44 and Gold at 0.24. Said differently, the risk-adjusted investment returns of farmland are some of the most impressive of any major asset class we have identified.

This attractive level of risk-adjusted return is one of the primary reasons that large institutional investors like TIAA have been rapidly increasing their investments in agricultural land.

(TIAA-CREF has produced an interesting white paper that delves further into this topic.)

Farmland Volatility on a Par with Traditional Low-Volatility Assets

Traditionally, many investors have looked to assets like bonds and certificates of deposit to help stabilize their portfolio, preserve their wealth, and shield them from volatility.

While these assets certainly do offer the stability element they’re known for, they don’t necessarily bring substantial returns. Returns from the Bloomberg Barclays Aggregate Index, one of the most common indexes of bonds in the U.S., returns averaged 4.4% per year between 2007 and 2017.

Compare that to farmland, which has returned 11% per year over the past three decades, while simultaneously exhibiting a comparably low level of volatility. In short, farmland looks like a solid store of capital that stands to earn a lot more than other go-tos for stability.

So, taking the evidence into account, could farmland be the new bond or CD? That’s a decision for each individual investor and their financial advisor.




For those who choose farmland, platforms like ours give more investors better access to the asset than ever before. Get started by exploring our offerings today.

Additional Note: The information above is not intended as investment advice. Data referenced herein is sourced from NCREIF, Bloomberg, Bankrate, NYU Stern School of Business, Federal Reserve Bank of St. Louis, with additional calculations and analysis performed by AcreTrader. All returns are estimates and assume reinvestment of dividends. This data reflects the period 12/31/1990 - 12/31/2018. Past performance is no guarantee of future results. 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.

Carter
Carter Malloy

Founder and CEO

Carter grew up in an Arkansas farming family and has had a lifelong passion for investing, agriculture, and conservation. Prior to founding AcreTrader, he was part of an equity investment firm and a Managing Director with Stephens, Inc.

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