What is Your Farmland Investment Risk Profile?
Our chart today in our continuing series exploring NCREIF rowcrop farmland returns data looks at relative volatility of appreciation rates among rowcrop regions from 2010 – 2024. The regions in the chart are sorted from the highest average appreciation rate on the left to lowest average appreciation rate on the right. The colored boxes represent half of all years (the two middle quartiles), while the top and bottom “whiskers” give the highest and lowest annual appreciation rates achieved during that time period. Also shown is the average appreciation rate of each given both numerically and represented graphically by the “X”, and the median represented by the line. A description of the results of each region from highest to lowest is as follows. The volatility and risk represented by each may not be what many people expect:
· The Pacific Northwest has enjoyed the highest average annual appreciation at 6.3%. It is also the second most volatile with a standard deviation of 6.4% (standard deviations are not represented in the chart). Note the lowest appreciation rate “whisker” is negative at -2.2%. All the individual regions have had at least one year of negative appreciation. Only the “portfolio” of holdings as represented by All US Row Crops does not have a year of negative appreciation.
· While the Cornbelt has the second highest appreciation rate at 6.1%, it also has had the most volatile appreciation by far, ranging as high as 22.0%, a low of -7.5%, and a standard deviation of 8.8%. Does the volatility in Cornbelt returns matter in the long run given its high average appreciation rate? We’ll take a look at this in another post.
· The Delta region may have been the most balanced in terms of risk vs reward with an average of 5.3%, a high of 15.9%, a low of -0.8%, and a standard deviation of 4.8%. Only the US portfolio as a whole and the Southeast have a lower standard deviation.
· The NCREIF Mountain States as a group had an average return 0.1% lower than the Delta at 5.2%, but is the third most volatile with a standard deviation of 5.2% and has seen higher highs and lower lows. This group is sort of a hodge-podge of states up and down the Rocky Mountains, including AZ, NV, NM, CO, UT, ID and MT. If you are familiar with agriculture in these states you know that includes a lot of variation in climate, soil, water and crops, with big variation from one valley to the next, never mind from state to state.
· Next in the order of average appreciation rates is the NCREIF category of “US Rowcrops” (listed as US Annuals in the NCREIF data set), which includes all US rowcrop ground owned. As stated in the callout box above, it can be thought of as the weighted average portfolio across all regions and shows the power of a portfolio of holdings with an average appreciation rate of 5.0%, but the second lowest volatility with the second smallest range from min to max with a standard deviation of 4.1%. It is also the only category here which has not had a negative year in the 2010 – 2024 time range. Only the Southeast has a lower volatility (see below).
· California rowcrops (Pacific West in the NCREIF data set) offered the second lowest return relative to risk, with an average appreciation of 3.8%, a standard deviation of 4.9% and lowest yearly appreciation of -4.2%, which is second only to the Cornbelt. That’s not to say that there are no opportunities in CA. Much of the recent volatility and negative appreciation can be attributed to something of a panic around future water availability. Those properties with solid long term water rights and supply can pose an opportunity, but buyers better be sure of the difference.
· Finally, we have the Southeastern States with the lowest average annual appreciation of 3.5%, but could be considered the least risky with the lowest standard deviation of 2.3%. That said, despite the low volatility relative to the other regions, it featured a year of negative returns of -0.4%, which is slightly worse than the much higher appreciation Delta region which had a low of -0.3%. Still, there may be room in a portfolio of land holdings in the Southeast as a way of reducing overall risk.
So here’s the big picture takeaway from this data; While farmland is often shown and thought of as both a good hedge against inflation and often lower risk than stocks, that data usually of returns of US farmland as a whole. If your farmland holdings are all within one region, you may have a higher risk/return profile than you might believe or are giving up higher returns with little or no increase in risk, just like owning stock in one company or one class of assets. Like stocks, portfolios can work but require some expertise to optimize.