Investments in farmland offer significant benefits that make them a solid choice for a well-diversified portfolio, including current cash income, appreciation over time and inflation protection. Consider this: From 1970 to 2009, agricultural land values, as measured by the U.S. Department of Agriculture's Economic Research Service database, outperformed both domestic stocks and bonds on an annualized basis, returning 10.25% compared to 6.24% for the S&P 500 and 7.3% for 10-year Treasuries. Land values also handily outpaced inflation, which averaged 4.36% during the period. What's more, farmland diversifies a portfolio in two important ways: Farmland prices are uncorrelated with stocks and bonds; and farmland is globally dispersed across continents and hemispheres, providing geographic diversification.
Several powerful, long-term trends bode well for farmland value: a growing global population, changing dietary habits; and a shrinking supply of arable land. The world's population grows by about 25 million people a year; to keep up, agricultural producers will have to nearly double their output by 2050, when the world is expected to have 9 billion people. Meanwhile, as the world has more mouths to feed, people in the developing world are becoming more prosperous and consuming more meat, which requires that they buy even more corn and grain to feed livestock. In addition, alternative fuel production — primarily ethanol and biodiesel l— is boosting demand for arable land.
Of course, every asset class has its risks. As investments, real assets such as farmland are subject to fluctuations in property values, as well as higher expenses or lower income than expected. They sometimes do not have sufficient cash flows and might need additional capital. Other risks include a lack of liquidity (i.e., few potential buyers), and investing in emerging markets can carry higher political and financial risks than in developed markets. However, expertise, local connections and a long-term investment horizon can significantly reduce these hazards.