THREE ESSAYS ON FARMLAND INVESTMENT
This dissertation is comprised of three essays focusing on farmland economics with particular attention to characterizing risk and return of farmland investment. The first essay in chapter two discusses the portfolio performance of different farmland qualities in different geographic regions in two Corn Belt states, namely Indiana and Iowa. I found that risk of different farmland qualities in different geographic regions are low compared to other assets. Excess return, however, is higher and statistically significant in Indiana relative to Iowa. Results also suggest that diversifying across farmland locations and qualities contributes positively to farmland investment in Indiana but not in Iowa.
The second essay in chapter three examines whether farmland has a risk factor in asset pricing models. In other words, I examine whether the additional return of farmland investment is associated with additional risk. Relying on the National Council of Real Estate Investment Fiduciaries (NCREIF) farmland property index and U.S. stock returns, I show that exposure to farmland risk has neither economical nor statistical explanatory power for the expected stock returns across a range of equity portfolios.
In the third essay in chapter four, I develop a decision rule to determine the optimal mix of owned and rented farmland operated by a farmer or agricultural investor. I do so by extending portfolio theory to get the optimal mix of owned and rented farmland that minimize farming risk. Utilizing data on West Central Indiana, this portfolio rule shows that owning is far more attractive than renting farmland. Chapter five concludes the three essays.