Farmland is one of the oldest asset classes in the history of investments, and it’s also among the most valuable.
Finite, income-generating, and historically stable, farmland investments have outperformed traditional investments like those in the stock market for the last four decades.
In this article we compare the farmland returns of this rewarding but often overlooked asset class to that well-known type of investment: stocks. Here are seven compelling reasons investment portfolios should consider owning farmland or investing in farmland over stocks.
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1. The law of supply and demand favors farmland.
Already, total farmland value represents $2.5 trillion in the U.S. and $9 trillion globally. In the coming years, the demand for farmland is only expected to climb. One of the most important reasons is that the global population is ballooning, going from 7.8 billion in 2021 to a projected 9.8 billion in 2050. To accommodate this huge population growth, the world’s food needs are forecasted to skyrocket by 50 percent over the next 30 years, and that should have a positive impact on farmland prices.
Meanwhile, as a swelling population spurs higher demand for food, an irreversibly dwindling supply means farmland will only become more valuable land in the coming years. Factors like temperature, sufficient moisture, and soil quality mean only certain parts of the world are arable (able to sustain farming), and additional market conditions like climate change will make this already precious real estate commodity even scarcer. Farmland is a real asset, and they aren’t making more land.
Fundamental economics dictates that as the demand for food production grows and the supply of farmland decreases, the value of arable farmland per acre and overall farmland returns increases. The future of financial markets, by comparison, is dramatically less predictable to individual investors and the brightest minds in finance.
2. Farmland investing consistently outperforms the stock market.
According to the U.S. Department of Agriculture (USDA), farmland value has risen every single year since 1988 (with the only exceptions being single-year declines in 2009 and 2016 during that time period). Over the last four decades, the average annual return of farmland was more than 10 percent when you factor in crop yields and cash rental payments. This doesn’t include the increase in land prices, and thanks to advantageous swings in commodity prices, it’s even possible higher crop prices can lead to higher returns.
With its double-digit average annual returns, farmland has consistently and historically outperformed stocks—which delivered a yearly average return of less than 7 percent during the same time period. Not only that, but farmland outperformed other popular assets like gold (7.3 percent) and AAA bonds (7.7 percent).
While historical performance does not always predict future returns, if the past is precedent, farmland and the savvy investors who have made a farmland investment will continue to outperform the stock exchange, especially in an environment of rising interest rates.
3. Farmland is much more stable than stocks (and virtually most other asset classes).
It’s unusual to find an asset class that delivers high returns with low volatility. But when it comes to stability, farmland is unparalleled. Regardless of factors like inflation, exchange rates, financial reports, and world events, people will always need food, and even one acre of farmland can deliver that. More investors have also realized that buying farmland is also significantly less volatile than buying stocks thanks to the low correlation between the two asset classes, where the stock market risk is often subject to massive, unpredictable swings in value.
4. Farmland investing provides diversification.
It’s one of those fundamental pieces of investment wisdom: Create a diverse portfolio. Diversification—or the practice of spreading investments across multiple industries and asset classes to reduce volatility—helps mitigate the risk that underperformance in one asset or an economic collapse affecting another will be disastrous to an investor’s portfolio while protecting their historical returns. A diverse portfolio should include assets that work in opposing directions, thereby reducing fluctuations in overall performance.
Because farmland is negatively correlated to stocks and many other traditional assets, farmland is ideal for portfolio diversification. In the event of an economic market downturn, a farmland investment with its land appreciation and income from farming operations should provide balance to your portfolio, and could even help offset some of your losses in stocks and other asset classes.
5. Farmland is a better inflation hedge than stocks.
With the threat of surging inflation on the horizon, farm real estate is especially attractive as a powerful inflationary hedge. Farmland and other real estate investments have long been considered reliable protection against inflation—or the rise of prices over time—because the land value tends to maintain or appreciate during inflationary periods, another important factor when considering what makes a good investment.
In the past, farmland values have kept up with inflation, with a 70 percent correlation with the Consumer Price Index (CPI) and a 79.8 percent correlation with the Producer Price Index (PPI). This is because as the cost of food rises, farmers can charge in higher prices, and subsequently farm land values increase as well. By comparison, stocks aren’t always a good hedge against inflation since higher inflation tends to increase borrowing costs, raise production costs, and decrease standards of living—all while reducing investor expectations on earnings growth, which places downward pressure on the stock market.
6. Investing in farmland supports local economies.
A farmland investment helps the overall agriculture industry, creating jobs while bolstering local economies. Particularly in developing regions like Latin America, the impact of the farming sector and can introduce new ideas and resources that can help transform the landscape and economy of an entire community.
Depending on the type of farm, an agricultural investment can have a major impact on the community, region, and world. The food grown on farms gets distributed to people around the globe, and adding farmland to your portfolio can play a role in the process of keeping the world nourished and healthy with less volatility in your portfolio.
By comparison, investing in stocks on Wall Street is unlikely to have as significant a social impact. Publicly traded companies are for-profit, and even those who value and promote social impact are driven by their bottom line. Plus, investors typically purchase stocks from other investors, so buying stocks doesn’t necessarily support a company or its mission directly.
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7. Investing in farmland is easier than ever.
While a reported 55 percent of Americans own stocks, only an estimated 1.5 million Americans—less than 0.5 percent of the U.S. population—own farmland or have made a farmland investment.
It makes sense, as historically, farmland investments were limited to a small universe of institutional investors and ultra-high-net-worth individuals due to its high barriers to entry. However, turnkey platforms like Farmfolio are making farmland investing easier and more accessible to different types of individuals around the world.
You no longer have to worry about asking how much does an acre of land cost or managing row crops or permanent crops on agricultural land to create passive income, as farmland partners like Farmfolio do all of the work. And unlike publicly traded farmland REITs on the stock market where you have no direct ownership, this is your land
By offering subdivided portions of farmland that have gone through an extensive due diligence process via our LOTs (Land Ownership Titles), Farmfolio has created an opportunity for individuals to buy land directly and start farmland investing in emerging markets with significant upside potential that are fast-becoming supply leaders in crops like limes and coconuts without having to worry about farm management or sales.
Visit farmfolio.net/farms to learn more about our current farmland opportunities, and see how you can benefit from the world’s most rewarding asset class and start generating passive income from farmland returns today.