How Does Farmland Perform During a Recession?
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This article was originally published April 1, 2020 and updated on September 29, 2022.
The AcreTrader team has written previously about investing in a farmland recession, and given the recent volatility in global markets, we wanted to take a moment to revisit the topic in today’s context.
One of the aspects that makes farmland investing so attractive is the historical performance of the asset class, which includes competitive returns in the form of annual cash flow as well as asset appreciation with relatively low volatility.
Below are a few considerations regarding farmland investing during recessionary periods.
- Why Farmland as an Investment?
- The Risk Adjusted Return of Land
- Investment Diversification
- Geopolitical Turbulence and Agriculture
- Final Thoughts
Why Farmland as an Investment?
Investing in farmland is similar to other forms of real estate, such as residential or commercial properties, in the sense that there are two different forms of income - cash flow and appreciation.
According to NCREIF, these two income streams have generated annual returns of 10-12% over the last 25+ years for farmland investors.
Past performance does not guarantee future results and there is no guarantee this trend will continue. You cannot invest directly in an index. Source: NCREIF. "Farmland" = NCREIF Farmland Index.
But there’s more to farmland than attractive passive income potential - farmland has also experienced less volatility than many other popular asset classes, including gold, bonds, and stocks.
In an unpredictable market environment, it is critical to understand the underlying volatility of your investments.
When considered in this context, farmland historically has demonstrated a superior risk/return ratio relative to other similar assets.
Past performance does not guarantee future results and there is no guarantee this trend will continue. Note: This data covers periods 12/31/1990 - 12/31/2021. All returns are estimates and assume reinvestment of dividends. Index information is provided for illustrative purposes only and is not meant to represent the results of an actual investment. Returns do not include any management fees, transaction costs or expenses. Volatility is measured as the standard deviation using the monthly total returns of each index or asset class. The historical performance of each index cited is provided to illustrate historical market trends. Risk/reward profile for each asset class varies significantly. This should not be construed as a recommendation of any specific security. You cannot invest directly in an index.
Each investment vehicle has differences in fee structure, liquidity, risk and tax factors, and objectives. Private equities are considered illiquid with a longer time horizon. Bonds are subject to interest rate, credit and call risks. CDs are short-term investments, FDIC insured and are subject to interest rate risk. Commercial Real Estate is subject to credit, liquidity, interest rate, and inflation risks. The S&P 500 is liquid, but subject to valuation and inflation risks. Gold can experience high volatility. REITS are subject to liquidity and legal risks.
Bloomberg, Federal Reserve Bank of St. Louis, NCREIF and NYU Stern School of Business. "Farmland" = NCREIF Farmland Index. "Timberland" = NCREIF Timber Index. "Commercial Real Estate" = NCREIF Property Index. "S&P" = Standard & Poor 500 Index. "REITs" = Dow Jones REIT Index. "CD" = Bankrate Historical 1-Year CD Interest Rates. "AAA" = ICE BofA AAA US Corporate Index. "U.S. Govt. Bonds" = U.S. Treasury 10-Year Bond." "Gold" = S&P GSCI Gold.
The Risk Adjusted Return of Land
We can further explore the risk adjusted return of farmland by considering the widely-used Sharpe ratio.
The Sharpe ratio is simply a way to numerically evaluate the excess returns generated above the risk free rate while taking into account its volatility (price swings).Using the Sharpe ratio allows professional investors to understand whether they are exposed to excessive risk in the pursuit of higher returns.
In general, a higher Sharpe ratio is viewed as better because it implies the asset is generating higher returns with lower risk.
Here again, farmland has demonstrated an advantage over other investments with a Sharpe ratio from March 1992 to December 2020 of 1.24, compared to 0.51 for U.S. stocks and 0.73 for U.S. Bonds, according to Nuveen Investments (A TIAA Company).
With recent major sell-offs in financial markets, it is worth considering how much exposure farmland investments may have to movements in the broader stock market, as many popular investment classes are heavily correlated in price to the stock market.
Importantly, farmland values have little to negative correlation with price movements within the stock market, as shown by one recent analysis from the University of Illinois Farmland Research Center.
For investors, this means that including farmland in a portfolio can provide an important diversification element that increases non-correlated returns while providing the potential to reduce overall volatility.
It is important to note that the diversification benefits from investing in farmland primarily apply to direct farmland investing (like on the AcreTrader platform) rather than to investing in publicly traded REIT.
Geopolitical Turbulence and Agriculture
The final benefit we’ll discuss briefly is the stability demonstrated by American farmland in response to various outside challenges. Unfortunately, geopolitical crises (such as the Russian invasion of Ukraine) as well as climate crises (such as China’s massive heat wave in summer 2022) have a large impact on supply chains, commodities prices, and macro-economics worldwide.
With weather, for example, it is not difficult to find examples of how mismanagement has made a crisis worse. In one instance in 1972, Soviet agricultural policies and an inability to deal with adverse weather led to a catastrophic grain failure despite growing on what is some of the best farmland in the world.
Overall, the U.S. has ideal growing conditions, occupying a part of the world that is in a “Goldilocks Zone” for climate, not too hot and not too cold. While not completely immune to weather or geopolitical factors, the U.S. has historically implemented policies and practices that have generally allowed it to endure crises well.
Rational water management, strong property rights and protections, and the increasing adoption of sustainable farming practices are a few examples of policies and norms that can help the U.S. cope with global changes—and how its farmers have historically proven themselves as a stable breadbasket for the world.
This had led it to having some of the highest crop yields in the world and becoming one of the world’s most consistent and largest exporters of commodities. In addition, as stated above, American farmland has consistently shown stable returns over decades, suggesting that when compared to other countries, the United States could be seen as a relative safe haven for food production.
Economic recessions present unique challenges to investors seeking to hedge against downside risk and find stable investment opportunities.
With its low volatility, lack of correlation to broader market indices, and strong position in global production (with respect to American farmland specifically), farmland offers a competitive and appealing opportunity for investors in difficult economic times.
The above content is not intended to be a comparison between products, but is intended for general, educational and informational purposes only. Any performance noted is historical and there is no guarantee any trends will continue. All investing involves risks, including the complete loss of principal. Diversification does not guarantee a profit or protect against loss in a declining market. It is important for each investor to review their investment objectives, risk tolerance, tax liability and liquidity needs before investing. Investment vehicles have differences in fee structure, risk factors and objectives. Investments are considered speculative, involve a high degree of risk and therefore are not suitable for all investors.
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