Date of this Version
It is frequently questioned how farmland as an investment can maintain its value while seemingly generating such low returns per dollar invested. Often a parallel is drawn between investing in farmland vs. a relatively riskless but higher return investment such as U.S. Treasury notes. Risky investments are expected to require a risk premium (higher returns) compared to a less risky investment. Yet it often appears that farmland returns are less than the return from relatively risk free opportunities. Further, farmland and other real estate investments are generally considered less liquid compared to other investments.
The investment market is complex. However, there are three aspects which help our understanding of the worth of an investment. These are 1) the pattern of returns from an investment, whether in the form of annual returns (dividends), capital appreciation or both, 2) income tax effects, and 3) risk. These are discussed in turn.