RISK AND RETURN IN AGRICULTURE: EVIDENCE FROM AN EXPLICIT-FACTOR ARBITRAGE PRICING MODEL

This article develops and estimates an explicit-factor Arbitrage Pricing Theory (APT) model in an endeavor to uncover (a) the systematic risk properties of returns to agricultural assets, (b) the relationship between agricultural returns and returns on comparable-risk nonagricultural assets, and (c) the possible relevance of agriculture-related risks in general capital markets. The article concludes that: (a) farmer-held assets have exhibited significant systematic/ factor risk over the 1963-82 estimation interval, but U.S. farmland has not exhibited such risk; (b) a grain-price index has been a priced factor in general capital markets; and (c) average returns on farmer-held assets have been significantly lower; and average returns on U.S. farmland significantly higher, than those on comparable-risk nonagricultural assets.