There are many benefits to investing in farmland, but three key traits make it an attractive asset class for a diversified portfolio. First, total returns are comparable or exceed asset classes like real estate, bonds, and the stock market. Second, farmland provides an inflation hedge. And third, low volatility gives farmland superior risk-adjusted returns.
1. Solid Total Returns
Over the last 20 years, farmland has returned an average of roughly 12%. Double-digit returns over such an extended timeframe should get investors’ attention. Farmland owners have enjoyed the benefits of income-producing real estate plus the price appreciation on the value of the land itself. Not only has farmland provided income and price appreciation, but it has done so with remarkable consistency. This is an asset class that performs well during the ups and the downs of the overall economy.
To put this in perspective, the S&P 500 has produced total returns of around 10%, dating back to the 1920s. By many metrics, total returns on farmland have exceeded the stock market over several decades. One of the reasons this surprising statistic might have been ignored in the past was because owning farmland was mostly out of reach for the average investor. It’s not anymore, but we’ll get to that in a minute. There are more benefits to farmland ownership you might not be aware of.
2. Inflation Protection
Farmland protects from inflation and acts as a hedge to rising prices. In recent years inflation has been relatively tame, but historically, there have been periods where inflation runs out of control. With the stimulus packages announced by the government over the last year, many investors are bracing for higher than average inflation in the coming years.
When prices for goods and services rise too quickly, investors scramble to protect themselves by looking for assets that “hedge” their investments. In the past, the stock market has experienced difficulties performing well during times of high inflation. Publicly traded companies are hit with the shock of rising costs, and profits could suffer. As a result, stock prices fall as money is allocated toward less risky assets.
The Best Inflation Hedge?
Historically, gold has been an asset class associated with inflation protection. Some would call it a “store of value,” others say it’s a “safe-haven” for when inflation runs too hot. One of the biggest criticisms toward gold investment is the fact that it doesn’t provide cash flow or a dividend of any kind. For this reason, income-producing land and real estate have been another favorite hedge to inflation.
Farmland is a great hedge against inflation because it produces the commodities that typically rise in price during inflationary environments. This creates higher cash flow for farms and higher land values from the crops it produces. With farmland investment, you get the best of both worlds during rising inflation.
3. It’s All About Risk-Adjusted Returns
You may be wondering why professional money managers constantly use the phrase “risk-adjusted returns.” Investors should be satisfied with a return, no matter how they achieve it, right? Why should I worry about “risk-adjusted” returns? Long-term investors should think about risk-adjusted returns because it can identify assets that perform well with relatively less volatility. Astute investors are looking for the highest possible return, with the lowest amount of risk. Period.
A well-constructed, diversified portfolio has superior risk-adjusted returns. This allows investors to sleep well at night, knowing their investments are not participating in wild price swings. Volatility is difficult to stomach for any investor. Watching your portfolio make large gains one day, only to plunge and show large losses the next, can become stressful and unpleasant. Wild price swings are not sustainable for most investors, and they will want out of such investments, often at precisely the wrong time.
Professional money managers know that they need to deliver returns to their investors, but they also must deliver peace of mind. Risk-adjusted returns are a way to show this balance between returns and a restful night’s sleep.
Know Your Sharpe Ratio
If you want to dig a little deeper into superior risk-adjusted returns, you’ll need to learn about the Sharpe Ratio. With so many investment choices available at your fingertips, the Sharpe Ratio can help determine which investment provides higher returns with the least amount of risk by factoring in its volatility.
The higher the Sharpe Ratio for a given asset class, the greater the risk-adjusted returns. Farmland has a Sharpe Ratio of roughly 1.4 over the last three decades, while the S&P 500 Sharpe Ratio of .5 pales in comparison. This does mean that there’s potential for the S&P 500 to outperform farmland in any given year; it also indicates the chance of larger losses for the S&P 500 on occasion.
The Sharpe Ratio of 1.4 for farmland is not only far superior to the stock market, but it’s also one of the highest ratios across many asset classes. This might help explain why the ultra-wealthy continue to invest enormous amounts of capital into farmland. If you need more proof, just read this summary of why Bill Gates is now the largest private farmland owner in America.
How Do I Invest in Farmland?
Ok, so you’re sold on the idea that it might be a wise decision to allocation a percentage of your diversified portfolio to farmland. How do you actually invest? What are your options when considering farmland investment? You could purchase an entire farm, which is highly unrealistic for most folks. High barriers to entry have made it difficult for the average investor to participate in farmland investment until now.
Fractional Farm Ownership with FarmTogether
Since 2017, FarmTogether has been on a mission to democratize farmland investing. The company believes that farmland is a stable, safe, and attractive long-term investment that should be available to everyone. The fractional share investing platform enables investors to purchase ownership in farmland, providing income, price appreciation, and long-term benefits that wealthy investors have enjoyed for decades.
Minimum investments begin at $15,000, and participation is limited to accredited investors only. There’s a possibility these limits could be reduced in the future, opening the door to even more potential investors.
Many of the offerings from FarmTogether feature permanent crops such as pistachios, apples, and almonds. Longer-term investments in permanent crop farmland can produce higher returns relative to row crop farmland such as corn, soybeans, and wheat.
On a Mission To Democratize Farmland Investing
With decades of experience in the agriculture industry, FarmTogether carefully selects properties to offer for investment. The team of industry veterans uses proprietary technology, intense property analysis, and a lengthy due diligence process to offer only the best farmland options.
The FarmTogether website features an extensive overview of how they select their investment offerings, down to the smallest detail. Analysis of soil quality, climate, water availability, and proximity to river and rail transportation are just a few of the considerations the team takes into account.
FarmTogether is focused on sustainable agriculture and regenerative farming. It’s a priority to the folks at FarmTogether, and they recently partnered with Leading Harvest, a nonprofit organization committed to the advancement of sustainable agriculture. 100% of the acres offered for investment with FarmTogether have been enrolled for certification by the Leading Harvest sustainability standards.
A Whole New Ballgame
In the past, farmland investing was reserved for ultra-wealthy multi-millionaires and institutional conglomerates. With the creation of platforms such as FarmTogether, it’s a whole new ballgame. Some of the most attractive investments for long-term portfolios are now offered to a greater audience.
The list of benefits to farmland investment is long, but three distinct traits should make it a consideration for every investor. Solid total returns, a sensible hedge to inflation, and low relative volatility for superior risk-adjusted returns make farmland a superb asset class worthy of almost any diversified portfolio.
If you’re interested in learning more about farmland investing or are ready to add it to your portfolio, check out FarmTogether.
This article is sponsored by FarmTogether, a company on a mission to democratize farmland investing.