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Smart investors are always on the hunt for the ideal asset class to diversify their portfolios without sacrificing returns. Traditional stocks and bonds have their merits, but true diversification and outperformance requires thinking outside the box. Enter farmland, an under-focused asset class offering strong, stable and uncorrelated returns to drive portfolio diversification.
Historical Performance
Farmland has two primary return drivers: appreciation and cash flows.
Over the past three decades, U.S. farmland has quietly grown in value by a staggering 208%, according to the USDA. Farmland is truly a supply constrained asset - there is no way to create more supply of farmland, and the amount of farmland is declining as it gets converted to housing. This, combined with increasing demand for food, drives farmland appreciation. Farmland appreciation has averaged approximately 6% per year since the 1950s.
In addition to appreciation, farmland offers consistent income driven by crop sales. This income is issued as distributions to investors. For row crops, income tends to be around 3-5% per year, but this can be 6-10% per year for specialty, permanent crops.
Combining ~6% average appreciation with 6-10% in annual cash flow drives ~12-16%+ average returns for specialty crop investors.
As the economy flirts with uncertainty and inflation remains stubbornly above targets, farmland stands tall as a hedge. When food prices rise, so does the income generated by farmland. This safeguards your investments against the erosive power of inflation. Farmland has historically outperformed during periods of high inflation, unlike other asset classes. This outperformance during inflationary periods is one driver of uncorrelated returns.
Tax Benefits
Farmland also offers tax benefits which lower investors’ tax burdens and allow them to take more of the profits home instead of paying the government.
Most notably, farmland improvements all qualify for 80% bonus depreciation as of 2023. So, when a farm is purchased, 80% of all improvement value can be immediately depreciated. This creates a passive loss which can be used to offset income from the farm investment or other passive income. Investors should check with a CPA to verify specific tax treatment..
Closing Thoughts
In a world where market volatility is the new norm, many investors are turning to farmland as a reliable, but uncorrelated asset class. With its notable historical return driven by both income and appreciation, farmland can form a sturdy, proven foundation for a diversified investment portfolio.
For more information on how you can incorporate specialty farmland into your investment portfolio, please reach out to investors@goldleaf.ag.
