How farmland endures in times of crisis
While there’s never been a moment in history exactly like this one, you don’t have to look too far back to see how farmland has handled economic turbulence. Here are just a few examples:
The 2007-2009 Financial Crisis
When the housing bubble burst, mortgage delinquencies soared and major financial institutions collapsed. The stock market and real estate both experienced double-digit losses.
While the drop in real estate prices affected farm values in some areas, overall farmland returns soared nearly 30% from Q1 2007 to Q4 2009, according to the NCREIF Farmland Property Index, the most widely trusted benchmark for the U.S. farmland industry.
In fact, in 2008, the average cost per acre of farmland increased by nearly 8%.
The COVID-19 Pandemic
The world came to a crashing halt in March 2020, and popular stock market hedges lost some of their appeal. Bitcoin saw half its value evaporate in two days. While gold fared well in the first year of the pandemic, it shed 10% of its value in the first quarter of 2021.
Even farmland wasn’t immune, experiencing little or no price appreciation during this period. But that doesn’t mean investors weren’t making money.
“An attractive feature of farmland is that it can provide investors with two distinct income streams: land appreciation and passive income via periodic rental and crop payments,” says Milinchuk. “This passive income cannot be found with traditional hedges, like gold.”
Although 2020 was an underwhelming year for U.S. farmland, the asset showed far less volatility than the stock market. Farmland’s annualized quarterly volatility in 2020 was roughly 1.5%, data from FarmTogether shows, while the S&P’s volatility reached approximately 34%.
All in all, the annual total return for farmland rebounded in 2021 to 7.83%, NCREIF data shows.
The Farm Crisis of the 1980s
While farmland is not free from rough patches, recent history has shown that it takes pretty extreme circumstances to bring around negative returns — and that they don't last long.
In a 2013 letter, the legendary Warren Buffett shared a cautionary tale about an explosion in Midwest farm prices in the ’70s and ’80s. Investors were rushing to buy farmland as a hedge against rising inflation.
However, the Federal Reserve responded by increasing interest rates to a record high of 20%, crushing indebted farmers and “ultimately causing farmland values to fall to levels only seen during the Great Depression,” says Milinchuk.
“Today, we’re grappling with a similar situation: Inflation topped 8% last month, and the Fed has begun to raise interest rates.”
But don’t expect a repeat. Conditions were a lot more extreme back then: Farms were loaded with far more debt than they carry today, and interest rates averaged double-digits throughout the ’80s.
Not to mention, Buffett’s story has a happy ending. In 1986, undeterred by the collapse in prices and his complete lack of farming know-how, Buffett spied a 400-acre farm in Nebraska with good fundamentals and snapped it up. By 2013, the farm had tripled its earnings and was worth five times more than he’d paid for it.
“The downward spiral seen in the 1980s led to the only two years of (only slightly) negative farmland returns post-World War II; between 1988 and 1989, farmland values increased by 5%. Designed to be a long-term hold, farmland investments are proven to be resilient — even in the most adverse conditions,” Milinchuk says.
Why is farmland so resilient?
Much of farmland’s stability comes from the simple fact that, no matter what’s going on in the world, people need to eat. But there’s much more to it.
“Farmland has been historically uncorrelated with other major asset classes, meaning that adding farmland to your portfolio can decrease overall portfolio volatility,” Milinchuk says. “From 1992 to 2020, the average volatility of farmland investments was 6.84% — far lower than gold at 14.8%.”
Farmland is a natural inflation hedge, since inflation is, in part, the increase in prices of consumer goods like food. It also provides a sort of inherent diversification, as investors can rely on more than one source of return. Those sources include:
- The appreciation of the land value itself.
- The rent paid for leased land, typically paid out on a quarterly, semi-annual or annual schedule.
- A share of the profit when goods go to market.
Scarcity also plays a role. Part of what makes gold a reliable store of value is that there’s only so much of it in the world, even if new sources are discovered every now and then. Meanwhile, the amount of farmland in the U.S. decreases every year, even as the population grows and the demand for food increases.
Lastly, unlike other safe haven assets, like bonds, farmland has a history of providing generous returns.
The NCREIF Farmland Total Return Index has increased nearly five times over the past 10 years, 10 times over the past 20 years, and 20 times over the past 30 years, Milinchuk says.
How to invest in farmland
FarmTogether is an investment manager that allows investors to buy stakes in U.S. farmland without purchasing entire farms.
When you invest through FarmTogether, you’re investing in institutional-grade farmland across the U.S. — from California to Oklahoma to Illinois.
These aren’t just any plots of land; FarmTogether is strategic about the deals it brings to investors. Only about 2% of deals that come across their desk make it to the platform.
“While farmland is known for its low volatility, no investment comes without risk. We mitigate these risks by being conservative in our underwriting and partnering with highly reputable and experienced operators in the space,” Milinchuk says.
“We also offer a range of investments, from corn and soybeans to almonds and citrus, to cater to various risk/reward appetites.”
During the vetting process, FarmTogether employs a 105-point checklist, analyzing soil quality, water availability, capital improvements, title, local legislation, depth of the supporting farming ecosystem, cost of inputs, farmworker wages and more.
In other words, FarmTogether handles all the hard parts for you.
Once you invest, returns are generated through both income and appreciation, so your investment should be insulated from a lot of market volatility. Rental payouts are automatically deposited into investors’ bank accounts. Then, at the end of the hold period, you’ll receive returns from land appreciation.
You can track everything online. Otherwise, you can sit back and let FarmTogether handle the rest.
“Over the last 40 years, farmland has demonstrated again and again its value as a stable asset, diversification tool and inflation hedge. Thus, we believe farmland is well poised to weather this crisis, just as it has in the past,” Milinchuk says.
Want to add farmland to your investment portfolio or dig deeper into the data? Learn more through FarmTogether.
Diversify your investments with farmland
You don’t have to own a farm to profit off farmland.
Farmland has proven to be one of the most stable assets of the past few decades — and with FarmTogether, you’re able to invest today. FarmTogether's platform gives accredited investors access to this exciting market, and one of the highest-yielding asset classes on a risk-return basis.
Sign up for FarmTogether to start investing in farmland.