Farmland Investment Characteristics from a Forward-Looking Perspective: An Explanation for the “High Return/Low Risk” Paradox

Xiaoguang Feng and Dermot J. Hayes

Abstract

Land values and cash rents are slow to adjust, and therefore the returns from owning farmland may be time varying and serially correlated. This article investigates a farmland portfolio’s nominal and real returns from a forward-looking perspective, taking into account time-varying return and serial correlation. The results indicate that the attractive average return level observed historically can be attained only over a long investment period. The risk involved in the long investment period, however, is also substantial. As a result, in mixed-asset investment portfolios, the allocations to farmland are much lower than traditional mean-variance optimization implies. (JEL Q15)

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