Determining the Nature of Dependency between Agribusiness and Non-Agribusiness Stocks

During the financial downturn of 2008, asset classes that investors traditionally found to have low correlation with U.S. stocks became more highly correlated at the most inopportune time. Post-downturn, investors increasingly looked for alternative assets that offer diversification benefits, one of which being farmland. One of the challenges of investing in farmland is that the asset is not a securitized, low-cost investment. The current research investigates the whether exposure to farmland via an index of agribusiness stocks provides significant diversification benefits. We estimated the dependence between daily returns of the S&P 500 and an index of agribusiness stocks from 1970 through 2008 using copulas. We find significant evidence that agribusiness stocks have strong lower tail dependence with large U.S. stocks and are actually less correlated in the upper tail of the distribution. Meaning, the agribusiness index moves in near lockstep with U.S. stocks in downturns and more independently in large upswings. This provides little evidence to support the investment strategy of purchasing agribusiness stocks broadly to gain exposure to farmland.