Proceedings

PR – North American Farmland Investment Performance Assessment Using E-V Analysis, CAPM And Value At Risk

Why is there a strong and growing demand for farmland investment from the non-agricultural sector? Over the study period 1972-2011, North American farmland investment yields have been very competitive with stocks, bonds and real estate. In this study, three methods are used to assess the investment performance of farmland within a diversified portfolio: the Capital Asset Pricing Model (CAPM), the Expected Value-Variance Model (E-V Analysis), and the Value at Risk (VAR) Model. The CAPM analysis suggests that farmland provides an investment yield that is greater than required, given that it adds little or no risk to a diversified portfolio. This also implies that farmland, given its competitive yield, can enhance investment performance in a diversified portfolio. Since CAPM is an equilibrium pricing model, it further suggests that farmland is underpriced and in a liquid, free trading market place, farmland prices would be bid up until the excess return disappears. The E-V analysis found that a North American farmland investment can improve the investment performance of the efficient set of portfolios at low and medium risk levels, but does not provide improvement for higher risk portfolios. Finally, the VAR analysis found that when North American farmland is added to a diversified portfolio, it reduces the maximum expected loss that can occur, thereby reducing the downside risk of the portfolio without reducing the expected yield. In general, all three methods, CAPM, E-V analysis and VAR found consistent results; that North American farmland has a competitive yield and is very good at reducing risk in a diversified portfolio, thereby improving overall investment performance.

Keywords: North American Farmland Investment, CAPM, efficient investment

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Author(s): Painter, M.J.

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Organizations(s): Edwards School of Business, University of Saskatchewan