December 01, 2019
Why Invest In Farmland? (Video)
Discussing farmland, and specifically it's investment performance, it's been about 11.5 or a little over eleven and a half percent since really being tracked in the in the 1990s.
This is a very good thing and note that these are all positive returns.
Again, you have a combination of income from the farmer paying you rent and the land appreciating in value that build-up to these positive returns each year and so that's why it's been so consistently positive for so long now.
Again, 11.5 percent return, and that's unlevered, meaning it's not using debt to amplify returns, so we think that is an incredibly impressive number.
if we look at the S&P, the green lines here are the same lines you just saw in the previous chart. So the green lines are the same lines and we just stacked the S&P next to it.
Similar annual return, just slightly lower at 11.1 percent of total return over the last almost thirty years but as you can see it whips back and forth in in huge directions.
Again, so we're clear, we're not arguing that people should pull out of equities especially.
Today, equities make up the majority of most investors portfolios and you know, I think farmland is a good way to augment that instability in those markets and with some consistent performance. And what's fascinating, we'll talk about correlation a little later, meaning the influence that one asset has on the other.
As you can probably spot here visually, farmland does not appear to have an impact on the S&P.
It's probably obvious but interestingly the S&P has statistically zero, or almost exactly zero, impact on farmland returns, so the consistency of farmland is not thrown up or down by moves in the larger stock markets.
Farmland versus gold, this one is also pretty interesting I think it's a pretty strong case against gold over the long term.
Gold does not provide you dividends it is seen as a hedge in times of economic uncertainty and volatility, but remember it's about compounding not timing and with gold investing you've got to be really good at timing.
With farmland investing, we're not there and the thing is that people often buy gold for is inflation protection and the statistics for farmland, we have an article written in Forbes about this, that we refer you to farmland is almost as correlated or correlated follows inflation as much as gold does so it provides you that a similar type of protection plus we get a yield.
Looking at farmland versus commercial real estate, again 8.3 percent is nothing to shake a stick at, but this is a quite a bit more volatility in commercial real estate and these assets offer short flexible leases that allows for renegotiation of fair rent and and leases as market conditions change and a few months of lost rent can place a property in default and lead to 100% losses for those equity investors in that commercial real estate.
Today we're seeing massive rent abatements and forgiveness programs and there's a lot of uncertainty in the world of commercial real estate today.
Farmland provides a partial shield from that uncertainty as most of the cash rents are paid up front or in bi-yearly annual installments and we have exceptionally low vacancy rates.
As far back as I can remember in farming or being in a farming family I can't remember a single year where we did not have a tenant, where we wanted one, or where we had a default so it's just a far more boring but very different asset class than what most of us are used to with commercial real estate.
Summarizing all this is a chart that many of you have likely seen on our website where we plot the annual growth rates.
So that 11.5 percent return against the volatility, meaning how much does the set whipsaw up and down in value. This is where farmland really stands out is something that's that's really interesting.
You can get similar returns way over on the right with the S&P and with REITs, but you have to be willing to accept a far greater amount of volatility.
Note: The information above is not intended as investment advice. 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.
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