Achieving Alpha with Agriculture Investments

Professional investors and money managers are obsessed with generating alpha, or returns in excess of a greater market benchmark, say the S&P 500 stock index. Alpha can also be compared across various asset categories, such as stocks, bonds, real estate, gold, etc. When allocating a portfolio among asset classes, diversification beyond stocks and bonds helps to earn higher returns and hedge against market corrections.

According to remarks at the Global AgInvesting 2018 conference by Dr. Bruce Sherrick, Director of the TIAA Center for Farmland Research in the Department of Agricultural and Consumer Economics at the University of Illinois, “agriculture is a high alpha, fairly low beta investment.” In other words, investments in farming can beat the equity markets while being less volatile (as measured by β or the beta coefficient), than stocks. The lack of volatility is fairly self-evident in that agriculture investments are generally long term and illiquid.

Growing Your Money with Agriculture

Though different types of crops in different geographies have difference performance trends, over the long term, U.S. farmland continues to outperform other asset classes. Permanent crops, such as almonds, or grapes, tend to have higher returns than row crops (including soy, corn, wheat, cotton). Over the long term though, even those commodity-based crops can beat the market by combining steady yields with land appreciation.

Farmland outperforms other asset classes and has significantly lower volatility.

Safely Diversify with Farming

Direct investments in production agriculture have a negative correlation to stocks and bonds, and protect a portfolio against food inflation.

Modern agricultural production techniques mean many risks commonly associated with farming investments can be mitigated or even eliminated. Tile drainage and pivot irrigation systems take the uncertainty out of rainfall in large scale outdoor farming operations. Indoor growing techniques take that one step further, allowing year round production and reducing, or eliminating weather, disease, and insect impacts.

The final way farm managers can achieve alpha for their investors is through cultivating a sound marketing strategy and strong vendor and sales relationships. Long term contracts for product off-take and distribution minimize volatility in pricing for commodity crops.