Farmland outperforms many other asset classes when it comes to its risk-reward ratio.
Volatile markets are risky markets. While some investors are perfectly comfortable making speculative bets on volatile assets, the vast majority would rather see steady growth over time.
But steady doesn’t always mean slow. In traditional investment environments, growth opportunities go hand-in-hand with risk. Many investors believe they have to balance their portfolios between low-return, low-risk assets and high-risk, high-return investments. However, these are not the only two options out there.
Investors who look beyond equities and other popular investments can find high-return, low-risk asset classes that also offer lower volatility than what is often found in today’s financial landscape.
Farmland fits this description perfectly. It is a durable, consistent investment with significant upside potential and markedly reduced volatility. It can resist unexpected market events, and can even generate inflation-resistant income with a low correlation to other real assets.
Farmland: High-Performance Real Estate with Reduced Risks
Farmland is increasingly gaining acceptance as an institutional asset class alongside other real estate options like residences and offices. However, housing and office prices are highly volatile, surging and crashing in response to market events. Farmland boasts many of the benefits that real estate investments offer but with a significantly reduced risk profile, as it doesn’t rely on tourism, development, or even economic growth to sustain value and generate income.
Compared to other asset classes, farmland consistently provides strong risk-weighted returns. It acts as a powerful portfolio diversifier, especially during periods of financial uncertainty when investors begin to take on more risk-averse strategies.
Farmland Offers Bond-Like Stability with Significantly Higher Yields
Between the years 2000 and 2018, U.S. farmland values increased with a volatility rate similar to that of the U.S. ten-year-treasury bond, which is the safest asset class investors have access to. Despite ultra-low volatility, U.S. farmland valuations delivered much higher yields than ten-year treasury bonds.
During that period, U.S. farmland only ever delivered negative quarterly returns once (-0.01 percent at the beginning of 2002). It rose in value alongside other asset classes when the U.S. economy was making significant gains, and it continued to yield positive returns even when the S&P 500 declined.
While it’s true that U.S. farmland has increased significantly in value over the past two decades, there are parts of the world where that growth is not yet priced in. Latin American agricultural producers are expanding their global footprint at a faster rate than their American counterparts. In fact, the United Nations estimates that Latin America and the Caribbean will account for 25 percent of global agricultural exports by 2028.
How Farmland Performs During Corrections and Recessions
For many risk-averse investors, the 2008 financial crisis is an important cautionary tale. Before the crisis, housing was considered a robust and highly resilient asset. Very few people foresaw the derivatives-based housing bubble for what it was. When the bubble burst, it impacted nearly every aspect of the global economy – except for farmland values.
During the four-year period leading up to the crisis, farmland consistently generated positive returns, outperforming the Dow Jones Industrial Average and the S&P 500. It kept up this momentum four years after the crisis as well.
Looking back, the eight-year period from 2004 to 2012 was a relatively profitable one for the entire agriculture sector. Even during this extremely volatile time with banks threatening to go under and housing prices crashing, farmland value remained relatively constant. Agricultural profits remained steady as well and uncorrelated with plummeting real estate values in other sectors.
This example is one of the most compelling reasons to invest in farmland. Whether investors have bullish or bearish sentiments about the current market, there is good reason to believe that farmland values will reliably outperform many standard economic indices, generate significant income for investors, and remain isolated from market-wide disruptions.
Farmland Investment Leading Up to Today’s Environment
Even before the COVID-19 pandemic struck, investors had been looking for alternatives to the sinking yields offered by Treasury bonds. The low cost of borrowing led to increased demand for real assets like farmland. As a result, farmland values have appreciated significantly in recent years, outpacing the earning potential of agricultural output but delivering more attractive yields than many other assets.
For example, the average U.S. ten-year bond yield was just under 2 percent in 2019. In Canada, this figure was 1.70 percent, while the United Kingdom’s was nearly 1 percent. Germany, with its embrace of “black zero” budget balancing, had a ten-year bond yield of -0.19 percent.
During the same year, U.S. farmland enjoyed a 4.35 percent yield. Throughout the COVID-19 pandemic and its worldwide economic repercussions, farmland has managed to retain its value and generate significant returns for stakeholders.
While it’s possible that farmland values can be damaged by worldwide crises, it’s more likely that farmland markets will rise in response to supply chain disruptions and dislocations in commodity prices. This kind of recession-proof performance is one of the reasons why the agricultural sector remained profitable even in the midst of the 2008 financial crisis and the pandemic, and likely will do so yet again in crises yet to come.
Add this High-Return, Low-Volatility Asset to Your Portfolio
Interested in adding low-risk, high-reward farmland to your portfolio? Watch the video below to learn more about our pioneering LOTs model that takes all of the sweat equity out of owning a farm while delivering all of the profits. Then click here to see our currently available opportunities or contact us using the form at the bottom of this page.