U.S. farmland investment returns: continued gains in 2022

Key takeaways

• Crop prices and farmland appreciation contributed to healthy returns and robust valuations for U.S. agriculture.
• The growth in number and market value of properties reflects an increase in institutional ownership.
• U.S. cropland performance varies considerably both by region and crop type.
• Resilience in the face of high inflation and interest rates strengthens farmland’s fundamental investment thesis.

U.S. farmland returns showcased sound demand fundamentals for agricultural products and strong interest in quality farmland assets in 2022. Elevated crop prices contributed to healthy income returns, while multi-year-high farmland appreciation reflected robust property valuations. According to the National Council of Real Estate Investment Fiduciaries¹ (NCREIF), institutionally owned farmland in the United States registered its strongest performance since 2015, with the total return of the NCREIF Farmland Property Index (FPI) improving 179 basis points (bps) to 9.6% for the year. This gain reflects positive results from both income and appreciation and is 70bps above the 10-year historical average.

Source: NCREIF Farmland Property Index, as of Q4 2022. See definitions in the disclosures section below. It is not possible to invest directly into an index.

In 2022, the FPI included performance metrics from 1,315 distinct properties, with a combined market value of $15.3 billion. The FPI total returns are separated into two components: income returns and capital appreciation (or losses). In 2022, U.S. farmland income returns, at 3.3.%, were 187bps lower than the 10-year average of 5.2%. The farmland appreciation component of the FPI is based on annual third-party appraisals of farmland market values, which are required for all properties included in the index. Strong appraisals in 2022 resulted in farmland appreciation reaching 6.2%, the highest level in 9 years and 258bps above the 10-year average of 3.6%. The robust increase in the total number and value of properties reflects growing institutional investment in the asset class and consolidation in farmland ownership. 

Source: NCREIF Farmland Property Index, as of Q4 2022. Market values are as of Q4 each year. See definitions in the disclosures section below. It is not possible to invest directly into an index.

NCREIF provides detailed farmland returns by crop type: Annual crops such as corn, soybeans, and vegetables need to be planted each year, while permanent crops are dedicated to perennial trees, shrubs, or vines bearing tree nuts, apples, cranberries, and wine grapes. At year-end 2022, the FPI comprised 992 annual cropland properties valued at $9.4 billion, accounting for 62% of the FPI, and 323 permanent cropland properties valued at $5.9 billion, accounting for the remaining 38% of the index. 

Source: NCREIF Farmland Property Index, as of Q4 2022. See definitions in the disclosures section below. It is not possible to invest directly into an index.

NCREIF farmland performance is also reported by region: In 2022, the largest NCREIF farmland region by market value was the Pacific West (39% of the index), followed by the Delta states (19%), the Corn Belt (13%), and the Mountain Region (8%). The three smallest regions, Southern Plains (2%), Appalachians (0.7%), and the Northeast (0.2%), combined to account for less than 3% of the FPI market value.

Source: NCREIF Farmland Property Index, as of Q4 2022. Other regions include the Appalachians (0.7%), Northeast (0.2%), and Southern Plains (1.9%). See definitions in the disclosures section below. It is not possible to invest directly into an index.

Performance results by region and crop type

Returns varied significantly across crop type: Annual cropland properties, accounting for 62% of the FPI by market value, generated a 14.4% total return in 2022 (up 339bps from 2021), 668bps higher than the 10-year historical average of 7.8%. On the other hand, permanent crop properties consisting of 38% of the FPI market value registered a mild 2.6% total return, down 50bps from 2021 and below the 10-year average of 10.7%.

In 2022, U.S. annual cropland’s total returns comprised an operating income return of 3.8% (up 15bps from 2021) and 10.4% in capital appreciation (up 316bps from 2021). The increased income returns in 2022 were a result of higher crop prices, driven by the continued strength in row crop demand both domestically and in the export markets. Increasing investor interest in U.S. row crop investments placed strong upward pressure on capital appreciation rates for annual cropland properties, registering a gain of more than double the 10-year average appreciation of 4.0%.

Source: NCREIF Farmland Property Index, as of Q4 2022. See definitions in the disclosures section below. It is not possible to invest directly into an index.

Conversely, U.S. permanent cropland properties generated a more modest total return of 2.6% (down 50bps from 2021) due to various market-specific challenges, posting the third weakest annual performance since the inception of NCREIF FPI in 1991. While the income return for permanent crops was 2.7%, down 186bps from a year ago, capital appreciation held virtually flat in 2022, ending a three-year streak of declining valuation. The relatively tempered performance of permanent crops reflects the continued challenges that can be attributed to the mixed price outlooks for fruits and tree nuts amid global supply and demand disruptions in 2022. These disruptions are in addition to increasing concerns over water availability in the Pacific West region, where 85% of all permanent crop properties by value in the FPI are located. 

Source: NCREIF Farmland Property Index, as of Q4 2022. See definitions in the disclosures section below. It is not possible to invest directly into an index.

Almonds, which accounted for 18% of the total FPI permanent cropland by market value, were a drag on overall permanent crop returns. Their total return slipped lower for the third straight year, registering –2.3% in 2022. This decline was due to suppressed price levels driven by sustained high stock levels, resulting partly from shipping difficulties in early 2022 and partly by declining valuations over concerns around water availability in California. Conversely, apples generated 12.3% in total returns, supported by 8.5% in capital appreciation and 3.7% in income returns. Consecutive years of underwhelming apple harvests in Washington had constrained supply, and new efforts to revive demand and boost apple prices created a positive impact for investors.

Source: NCREIF Farmland Property Index, as of Q4 2022. See definitions in the disclosures section below. It is not possible to invest directly into an index.

While all 11 regions in the FPI generated positive income and appreciation returns in 2022, regional performance showed significant variations. The Corn Belt (28.0%), Delta states (13.1%), Lake states (16.4%), Northeast (20.0%), and Northern Plains (20.0%) saw double-digit percentage total returns and displayed strong capital appreciation and stable income. Meanwhile, the Pacific West was the worst-performing region, producing 2.8% in total returns in 2022, which was 686bps below the overall FPI total return and 87bps lower than the previous year’s performance. Accounting for 84% of the region’s market value, permanent crop properties in the region registered only a 1.7% total return, more than offsetting the 9.2% total return generated by the region’s annual cropland properties.

Source: NCREIF Farmland Property Index, Manulife Investment Management Timber and Agriculture (MIMTA) research, as of Q4 2022. Bps refers to basis points. See definitions in the disclosures section below. It is not possible to invest directly into an index.

Resilience and outstanding performance

Manulife Investment Management's optimistic outlook for U.S. agricultural investments continues following overall outstanding performance in 2022. At the macroeconomic level, the resilience exhibited by farmland returns amid high inflation and interest rates of the last year strengthened the asset class’s fundamental investment thesis: providing investors with stable risk-adjusted and inflation-protected returns.

Looking ahead, global demand for agricultural products is expected to continue growing due to an expanding population demonstrating an increasing appetite for healthy and nutritious diets. The growth in domestic demand and international trade supports a bright outlook, while nascent developments in the carbon credit market due to soil’s carbon capture potential could create a new tier of demand. On the supply side, the lingering effect of drought in South America, combined with low global crop inventory levels, remains supportive of elevated price levels that are above historical averages. There are also headwinds: Inflationary pressure is still expected to weigh on U.S. agriculture due to production costs, while global geopolitical and climatic uncertainties remain key risk factors for production and trade flows. Nonetheless, Manulife Investment Management believes sustainably managed farmland assets should remain attractive for investors looking for positive yield, low volatility and the additional potential benefits offered by a nature-based climate solution.

1 NCREIF collects U.S. farmland property-level performance realized by institutional investments and reports the aggregated results within its Farmland Property Index (FPI). Manulife Investment Management is a participating member in the FPI. The index requires participating managers to report all eligible properties. Usage of this data is not an offer to buy or sell properties.