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Investing Fundamentals

October 11, 2018

Low Volatility and Risk-Adjusted Returns on Farmland Investments

It seems fair to say that farmland has impressive historical returns and appears to be a conservative investment option, especially given the relative lack of leverage compared to other real estate sectors.

However, a closer look at historical price swings reveals another important variable in farmland returns: a lack of relative price volatility.

Strong Returns and Lack of Relative Price Volatility

The first chart below shows farmland and other asset class returns over various time periods, indexed to 10 years, 15 years, 20 years, and 25 years. Farmland exhibits some of the strongest return characteristics of any major asset classes.

returns-of-various-asset-classes-over-time.JPG The second chart below looks at the standard deviation (volatility) of those returns over the same time periods.

volatility-of-various-asset-classes-over-time.JPG These two charts show that not only has farmland produced impressive returns over time, it has done so with far less volatility than any of the other asset classes that even come close to it in terms of returns.

Risk-Adjusted Returns on Farmland Investments

Professional asset managers often use the Sharpe Ratio to describe financial returns within the context of adjusting for risk. The formula is rather simply defined as the excess average returns divided by the standard deviation (volatility) of those returns. A higher Sharpe Ratio implies greater risk-adjusted returns.

For some context, over the last 25 years, the Sharpe Ratio of farmland in the above dataset is near 1.4 versus the S&P 500 at 0.44 and Gold at 0.24. Said differently, the risk-adjusted investment returns of farmland are some of the most impressive of any major asset class we have identified.

This attractive level of risk-adjusted return is one of the primary reasons that large institutional investors like TIAA have been rapidly increasing their investments in agricultural land. TIAA-CREF has produced an interesting white paper that delves further into the above topic.

To explore opportunities to invest in U.S. farmland on AcreTrader, please see our current listings here.

Note: The information above is not intended as investment advice. Data in the charts above is through year-end 2017 is sourced from Bloomberg and NCREIF, with additional calculations and analysis performed by AcreTrader. Past performance is no guarantee of future results. For additional risk disclosures regarding farmland investing and the risks of investing on AcreTrader, please see individual farm offering pages as well as our terms and conditions.