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 has outperformed traditional investments for the last four decades.
In this article we compare this rewarding but often overlooked asset class to one of the most well-known types of investment: stocks. Here are seven compelling reasons to choose farmland over stocks.
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.
Meanwhile, as a swelling population spurs higher demand for food, an irreversibly dwindling supply means farmland will only become more valuable 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 climate change will make this already precious commodity even scarcer.
Fundamental economics dictates that as the demand for food grows and the supply of farmland decreases, the value of arable farmland increases. The future of financial markets, by comparison, is dramatically less predictable, even to the brightest minds in finance.
2. Farmland consistently outperforms stocks.
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). 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.
With its double-digit average annual returns, farmland has consistently outperformed stocks—which delivered a yearly average return of less than 7 percent during the same period. Not only that, but farmland outperformed popular asset classes 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 will continue to outperform stocks.
3. Farmland is much more stable than stocks (or virtually any other asset).
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. Farmland is also significantly less volatile than stocks, which are often subject to massive, unpredictable swings in value.
4. Farmland 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. A diverse portfolio should include asset classes 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, farmland should provide balance to your portfolio and could 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, farmland is an especially attractive asset class 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 value of land tends to maintain or appreciate during inflationary periods.
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 farmland becomes more valuable. 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 stock prices.
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 these investments 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.
By comparison, investing in stocks 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.
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.
It makes sense: Historically, farmland investing was 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.
By offering subdivided portions of farms via our LOTs (Land Ownership Titles) program, we’ve created an opportunity for individuals to benefit from the significant upside in emerging markets that are fast-becoming supply leaders in crops like limes, lemons, coconuts, avocados, and teak—all without having to worry about farm management or sales. Visit www.farmfolio3.wpengine.com/farms to learn more about our current farmland opportunities, and see how you can benefit from the world’s most rewarding asset class.