Returns to Farmland Investment in Alberta, 1964-89

The objective of this study was to analyze the performance of Alberta farmland relative to investment opportunities from financial securities. It is an extension of an earlier study undertaken by Mercier (1988) and Phillips et al. (1989). This study re-examines the period from 1964 to 1985, and extends the data series to 1989. The results show that Alberta farmland out performed the stock market in both nominal and real terms, but with greater volatility. In nominal terms, farmland had an annual return of 19.8% as opposed to 12.2% in the stock market. The standard deviation of returns in farmland was 20.6% compared to 16.2%. The real return for farmland was 12.6% whereas the stock market earned 5.9%. About 55% of the total return to investment in Alberta farmland was due to capital gain; measured in real terms, income accounted for the major portion at about 66%. Farmland and stock market returns were found to be uncorrelated in both nominal and real terms. Beta values, which measure the degree of association, were estimated at -0.1632 and -0.1351 for nominal and real terms respectively. Neither nominal nor real beta values were significantly different from zero at the 5% probability level. These results are not inconsistent with earlier studies, and are attributed to the fact that returns in agriculture are subject to a different set of economic and environmental influences than are present for the stock market generally. This suggests possibilities for risk reduction by including stock market investments in conjunction with farmland ownership. Whereas no correlation was found between farmland and the stock market, returns in excess of what can be explained by compensation for risk were detected. The estimated alpha values of 11.27% and 10.21% for the nominal and real situations were significantly different from zero at the 5% level of probability. These values may be due, partially, to the fact that real estate taxes were not deducted in computing the results. Furthermore, the costs of administration in farmland investments, because of the much less formal market environment in which they are held, may be considerably greater than for the stock market. In addition,' stock market investments are considerably more divisible and liquid than is the farmland counterpart. Factors such as these bear further study.