Farmland is an attractive long-term investment that offers current income, capital appreciation, an inflation hedge and favorable diversification that is negatively correlated with traditional asset classes. In fact, since the end of WWII farmland in the United States has experienced a steady rise in value for every year except four (1983, ’85-’87). Most investors have experienced wrenching declines in the value of their portfolios lately, but those with an allocation to agriculture benefited from less volatility and positive returns to offset losses from the other asset classes.
Row crop farmland has consistently produced cash income of between 4% and 8%. In addition to direct farm cash rents, ancillary sources of income include hunting leases, billboard rents, timber sales, oil & gas royalties and an emerging revenue source--windmill leases.
A significant component of farmland total return is capital appreciation. As demand for agricultural products increases and the supply of arable land suited for agriculture declines, farmland increases in value. Purdue University found that the value of average quality farmland in Indiana increased on average by 7.4% over the past 20 years.
Farmland has a positive correlation with inflation and is considered a classic inflation hedge. In fact many investors view it as more favorable than other hard assets such as gold because farmland produces positive cash flow while shielding from the deleterious affects of inflation. The U.S. is the world’s largest debtor and government has a natural tendency towards creating inflation whether through deliberate conduct or the unintended consequence of well-meaning policy.
Farmland is negatively correlated with most traditional asset classes including stocks and bonds and is only somewhat correlated with commercial real estate. This provides portfolio stability during volatile markets while enhancing a portfolio’s risk adjusted return.