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Farmland Investment Characteristics from a Forward-Looking Perspective: An Explanation for the "High Return/Low Risk" Paradox
- Land Economics
- University of Wisconsin Press
- Volume 96, Number 2, May 2020
- pp. 291-303
- Article
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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)