The Role of Appreciation in Farmland Investment Performance

This article was edited to meet broker-dealer compliance guidelines in April of 2023.

People invest with several goals, usually some variation of capital growth or income. Historical data indicates that farmland can help investors achieve both.

In certain economic cycles, like the low-interest-rate environment we saw in the wake of the Covid-19 pandemic, many investors looked to farmland as an income play. For example, investors have historically been able to earn 3-5% in annual distributions as a result of rental income and agricultural production on their row crop land.*

As interest rates have risen in response to high inflation, however, those yields have looked less attractive in comparison with fixed income coupons, which are now hitting 4-6% annually. These shifts have some investors asking: is farmland still the investment it was a year ago?

In our opinion yes, because of land’s differentiator: value appreciation. In a high-inflation, high-interest-rate environment, real assets like land are extremely important because of their ability to store real value through economic changes and increase in value over time.

Contents

• How Much Does Land Appreciate Per Year?
• Farmland Values During Economic Turmoil
• Why Does Land Appreciate?
• What Has Historically Caused Farmland to Lose Value?
• Why Have Farmland Values Increased So Rapidly Lately?
• Recent AcreTrader Exits Demonstrate Appreciation
• Final Thoughts

How Much Does Land Appreciate Per Year?

First, a look at basic trends in farmland appreciation.

Based on data from the USDA, the compound annual growth rate for all U.S. farmland is 5.9% since 1970. Mainly, this has been a slow and steady gain, without the frequent steep ups and downs or volatility you see in stock values.

It’s important to note that farmland investment returns consist of two components: underlying value appreciation and income produced on the farm. The figure above excludes crop income, reflecting only the real underlying land value as measured by the USDA.

Since 1990, the National Council of Real Estate Investment Fiduciaries has collected nationwide data on farmland investment returns. When you look at NCREIF’s measurement of total returns comprising both income and appreciation, you get an average annual return of 10.4% from 1990 to 2022. We use NCREIF total return data to think about farmland investment performance as a whole.

Farmland Values During Economic Turmoil

It’s important to note that this trend generally holds true even during economic turmoil.

Real farmland values took small losses in recent recessions, but when you take crop income into account, these investments still generated income for landowners. Moreover, farmland values quickly rebounded, continuing to trend upward.

Past performance does not guarantee future results and there is no guarantee this trend will continue. You cannot invest directly in an index. Data source: Calculated by AcreTrader using information from NCREIF. "Farmland" = NCREIF Farmland Index.

Perhaps even more importantly, especially for the investor comparing farmland to fixed income, farmland tends to hold its value during inflation.

When inflation outpaces interest rates, investors typically realize negative real returns in financial assets. The Consumer Price Index (CPI) hit a high of 9.1% in June 2022, setting up a negative real interest rate environment in which real returns to fixed income investments were diminished by rising inflation. Adjusting a 3% rate on a money market account for inflation creates a negative return of over 6%.

In contrast, farmland investment returns, generated by both income and property appreciation, have been positively correlated with the CPI. Additionally, a 2020 study from the TIAA Center for Farmland Research found that when comparing 10-year averages of farmland values and CPI, farmland shows a positive spread to the CPI in every decade since 1970.

Past performance does not guarantee future results and there is no guarantee this trend will continue.“Farmland”= aggregate return series comprising rental income plus appreciation less estimated property taxes, divided by initial value of farmland in the top 32 states ranked by agricultural activity. “CPI”=Consumer Price Index, a common inflation measure computed by the U.S. Bureau of Labor Statistics.

Why Does Land Appreciate?

Farmland appreciates because it produces crucial commodities that humans rely on every day for food, animal feed, and fuel.

Land is a tangible asset, and it’s finite, unlike many other assets. More productive farmland is lost every year. Through development, erosion, and other factors, we are losing farmland globally.

At the same time, our need for farmland continues to grow. The world’s population just surpassed 8 billion. What’s more, incomes are expanding in much of the world, which leads to higher demand for meat, and in turn, the grain to produce it. The Food and Agriculture Organization of the United Nations (FAO) calculates that we’ll need to increase agricultural production 70% by 2050 to keep up with growing demand.

So why not just invest in commodities? AcreTrader believes you may be missing out on the underlying value storage and appreciation potential of the asset that produces those commodities. In addition, commodity prices tend to experience more extreme ups and downs than farmland itself. (For an example, take a look at corn trends since 1960.)

What Has Historically Caused Farmland to Lose Value?

Farmland values have fallen in 6 of the past 52 years.

Four of those years were in the 1980s, when the entire agricultural sector experienced a serious recession. Exacerbated by the oil and interest rate crises of the era, these losses in farmland values were largely caused by huge amounts of debt in farmland markets.

Today, debt-to-asset ratios are less than half what they were at that time. During that era, interest rates also peaked at around 20% (as compared to 2022’s federal funds interest rate of 4.25-4.5%).

While global economic factors caused real farmland values to fall slightly in both 2009 and 2016, total farmland returns were 6.3% and 7.1% respectively, due to the added component of crop income.

Macroeconomic forces and overleveraging aside, it’s important to note that farmland values are highly regional and even parcel-specific, depending on factors as varied as crop type, farm condition, and local market norms. For an investor, farmland value risk can be somewhat mitigated by diversification of and rigorous due diligence on potential investment properties.

Why Have Farmland Values Increased So Rapidly Lately?

In the past year, farmland has seen major appreciation, with record-high U.S. farmland prices widely reported.

The USDA Land Values 2022 Survey found that between June 2021 and June 2022, U.S. farmland appreciated by 12.4%.

This growth is attributable to a variety of factors, including macroeconomic influences like:

• rising food and commodity prices, as reflected in rising inflation rates
• geopolitical turmoil disrupting regular supply chains
• government measures to support vulnerable industries during the pandemic.

Recent AcreTrader Exits Demonstrate Appreciation

We are seeing these appreciation trends play out in AcreTrader investments. Between December 2021 and November 2022, AcreTrader exited five farm investments, with final IRRs ranging from 11.4% to 30.3%.

These farms were sold as attractive offers emerged within their local markets. Because their hold periods were relatively short (none longer than 3 years), we attribute the bulk of those returns to farmland appreciation, corroborating the larger trends we’ve seen recently.

Final Thoughts

• Farmland investing has historically been a viable strategy for value preservation during economic shifts.

• This is due largely to value appreciation over the long term, which is a result of global forces like population growth.

• Amid the economic changes we’ve seen in the past few years, farmland appears to be responding in keeping with the historical precedent of tracking inflation.

If you’d like to explore adding farmland to your investment portfolio, take a look at current and exited property offerings on our investments page.

*Source: USDA NASS Historical Land Values and Cash Rents over a 50-year period

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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