Guest blog by Bruce J. Sherrick, PhD,
University of Illinois - Fruin Professor of Farmland Economics and Director of the TIAA Center for Farmland Research

Interest in real estate and other alternative or Alt-investments has increased substantially in the past couple of years. Forbes magazine, for example, reported that the share of financial advisors recommending Alts to their clients increased from 25% in 2020 to 55% in 2024 (Fred Hubler, 9/10/2024). Among these, agricultural real estate has stood out because of the understood positive correlation with inflation, low correlation with equity returns, and low risk of capital loss with relatively consistent income. Interested investors need accurate information about the returns profile they might earn from agricultural real estate investments and most commonly rely on the National Council of Real Estate Investment Fiduciaries (NCREIF) Farmland Returns data system. While NCREIF is more well known for its family of commercial real estate fund indexes, it also produces indexes for timberland and farmland investments. The NCREIF Farmland data were first made available over thirty years ago beginning in 1991, and have been reported using a consistent accounting system across all contributing members since. The results are subdivided by location, property type, and management type and are held primarily by qualified institutions (e.g., pension fund and related managers). The properties are regularly appraised under specific and complete guidelines intended to provide an accurate mark-to-market valuation each quarter and reflect specific treatment for sales, partial sales, and capital improvements for example. The index contains only commercial scale properties used in active agricultural production, and all returns are reported on a fully-accounted accrual unlevered basis to allow a direct assessment of property-level performance on a common base. Importantly, both current income and appreciation returns are available to better understand the components of return.

As of third quarter 2024 (most recent available at time of publication), the total market value of the index was $16.51 billion comprised of $9.72 billion in annual cropland and $6.79 billion in permanent cropland across a total of 1,031 properties across 12+ different production regions. Average property values are high relative to the broader population of farms in the U.S. at approximately $16.0 million per farm, but in this sense represent commercial scale operations with clear return-seeking motivations in management in contrast to some components of the broader USDA data which include hobby farms and lifestyle units as well. While $16.51 billion is a relatively small share of the $4 trillion asset class, it is viewed as highly representative and is used by other non-reporting entities for benchmarking and evaluation of performance.

Table 1 contains summary information about farmland returns organized in panels from top to bottom that represent different classifications by type, location, and hold period. Returns are presented as annual returns by different hold periods as of each 3rd quarter-end. Each year’s property weights are determined by the actual properties in the fund at each point in time.

Over the 33-year history the Total Farmland returns have averaged 10.29% per year with a standard deviation of returns of 6.74%. For comparison, the Dow Jones index has averaged slightly more than 8% with a standard deviation of 14%. Importantly, the minimum return during that period was +2% for farmland and -41.3% for the Dow Jones index. Recent returns have been low for permanent crops but have similar 33-year average returns compared to annual crops, but with higher volatility at 10.26%. Columns in the table from left to right show comparable measures for increasingly longer holding periods. Annual cropland returns over the previous few years have been exceptional with the 5-year average over 9%, while low tree nut and fruit prices have hampered the returns to permanent crops. While permanent crops present higher risk than annual crops, both still tend to be safer than equity investments in public securities as measured by CVs or related riskiness measures over very long holding periods. The most heavily represented areas for permanent crops are along the west coast, and for row crops are in the Midwest and Delta regions. Importantly, the index has historically generated higher rates of return across for annual or row crop farmland than similar measures derived from USDA sources but lower returns for permanent crops due to relative overweighting tree nuts and some areas of production that have had abnormally lower returns over the past few years.

The second section of the table shows Annual Cropland returns by region ordered by total value. The lower section of that panel also summarizes by Commodity, Produce, and All Others to provide a sense of the impact of regions and crop type differences. The longer-term averages are more similar than the short-term recent performance which strongly favored Corn Belt and Lake State region annual crop production. By their nature, annual crops tend to have more stable returns or lower standard deviations than permanent crop returns and are viewed by many as equivalent to “fixed income” with strong appreciation performance.

The section showing Permanent Cropland is subdivided by region, type of crop, and additionally by management type – directly operated versus leased. This portion of the table highlights the differences between crop types, periods of time and type of operation. It would be expected that over the long run, directly operated permanent crops would generate slightly higher returns than leased crops reflecting the additional risk. This relationship holds over the long run, but exposure to a single crop type, or marketing episode can substantially impact the short term returns as shown for tree nuts in particular which have suffered particularly low prices and higher water costs over the recent few years. There is some emerging optimism as prices have shown signs of beginning their rebound, and as lower productivity farms are being taken out of production often to consolidate the associate water on more efficient varieties or blocks.

The final panel in the table groups all asset and management types by Region Totals and provides the same information in cases where the region contains only annual crops to highlight those cases. A recent addition to the reportable portion of the index is the Northern Plains which has performed relatively well over its short period during which it had enough properties to be reported without risk of individual property or manager information being shown.

Since its inception over 33 years ago, the index has grown and matured into the most broadly referenced and most reliable source of data for measuring and describing returns to at-scale investments in farmland managed under fiduciary requirements for third party investors. As such it deserves special attention for its relevance both in terms of the actual values, and for comparison to alternative investments. It is safe to say it is now an accepted asset class and part of the emerging Alt and natural capital space – and the NCREIF Index is the most widely referenced source of industry information about performance. In terms of investable real asset classes, the conclusion remains that farmland is an incredibly good diversifying investment with low relative risk, good inflation hedging performance, and strong capital preservation security over the long run.

NCREIF Farmland Index members have widely supported verification and reporting of the environmental aspects of their investments in addition to the financial performance. Investor interest in understanding and reporting their sustainability- and practice-related impacts has grown and Leading Harvest has is emerged as the de facto standard for verifying and reporting sustainability and conservation efforts within the sector. NCREIF members have been instrumental in helping Leading Harvest and vice versa in coordinating efforts for responsible and sustainable agricultural production systems. For more information on Leading Harvest, visit LeadingHarvest.org.