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I grew up on a farm and the fond memories I have are abundant: jumping off haystacks with my siblings, helping my Dad deliver newborn lambs on a cold winter morning (for our sins, lambing season always fell early on our farm) and getting excited for the crops to be cut each year when our house and farm would turn into a mini little town for a few days each year, with all the hustle and bustle of workmen and machinery.

Anyway, sorry, enough about my childhood!

You might think that the only tangible way to invest in farmland is to actually own a farm.

But that's far from the case, and in this guide I'll explore all the options farmland can offer from an investment perspective and how you can get started.

Topics covered:

• 🕵🏼 Farmland…in numbers
• 🌾 Why invest in farmland
• 🗒️ How to invest in farmland
• ⛔️ Risks involved
• Tools, resources and further reading 📚

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Farmland…in numbers 🔎

As reported by the U.S. Department of Agriculture (USDA), the total expanse of farmland in the United States amounts to approximately 911 million acres.

Farmers and ranchers own ~61% of the land they use, renting the rest from third-party landlords.

While other operators own 8% of this land, investors groups (including retired farmers) hold the remaining 31% of America's farmland, with 21% owned by non-operating individuals or partnerships and 10% held by corporations, trusts, or other owners.

As you can see, that’s a fairly hefty number of non-farmer owner land. And to put the growth of farmland investing in context - in March 1981, Clifford Ganschow and Frederick Gale attempted to launch Growth Farm Investors, a farmland fund for institutional investors with a projected value of $10 million. Unfortunately, the fund failed to garner enough interest, and the launch was unsuccessful.

Today, just over 40 years later, an estimated $26 billion of United States farmland is owned or managed by institutions.

So what do farmland $ returns look like? 💰

Agricultural land, as measured by the US-only NCREIF Farmland Index, has outperformed both domestic stocks and bonds on an annualized basis over the last 48 years, providing both consistent income and capital appreciation.

As the chart below shows, $10,000 invested in farmland in 1991 would be worth over $215,800 today. Pretty impressive.

What’s perhaps even more impressive, particularly in comparison to assets with extreme fluctuations e.g. crypto, the levels of volatility for farmland are enticingly low.

Why invest in farmland?👩🏽‍🌾

OK, so the most logical rationale for investing in farmland I’d argue is down to good old fashioned supply and demand fundamentals. It’s positive, in that demand outweighs supply and due to an increasing worldwide demand for food, it’s unlikely to diminish.

According to the UN, the world's population is expanding by over 67 million people annually.

By 2050, agricultural producers will need to cater to a population of more than 9.7 billion individuals. Meeting this demand will necessitate doubling agricultural output from 2010 levels, as estimated by the Global Harvest Initiative 2019 GAP report. To achieve this, an annual average growth of at least 1.73% in total factor productivity (TFP) is required.

While global agricultural TFP has been increasing by an average annual rate of 1.63% since 2002, compounded over 40 years, this falls six percent short of the target. Developing countries, like China and Brazil, are facing increasing constraints, such as limited clean water supply, which pose challenges to sustain the necessary productivity growth. Consequently, there is likely to be continued pressure on prices for food-producing land.

Another critical factor driving the demand for agricultural products is the rising protein consumption in developing nations. The growing middle class in these countries is becoming more prosperous and, as a result, consuming greater quantities of protein.

The Organization for Economic Co-operation and Development (OECD) estimates a 21% increase in the consumption of major meat proteins (beef and veal, pork, poultry, and lamb) in developing countries through 2027. As protein consumption rises, so does demand for grain since producing one pound of beef protein requires approximately ten pounds of feed grain. This shift toward greater global protein consumption will significantly boost the demand for grain in the agricultural sector.

And another plus can be…tax benefits.

Farmland investing has tax benefits, such as sales or property tax exemptions, depreciation, and various deductions.

Also, farmland can qualify for a 1031 exchange and can be invested through an individual retirement account.

Finally, there’s one more big reason that farmland is an especially compelling investment right now: inflation.

Unlike conventional financial assets, which tend to lose value when consumer prices go up, the value of farmland actually tends to rise when prices rise.

The NCREIF Farmland Property Index, which tracks the value of farmland owned by investors, rose 10.2% in 2022 — that’s even more than the rate of inflation, which hit a four-decade high of 9% in June. The S&P 500, on the other hand, lost about 20% of its value over the course of the year.

How to invest in farmland 🕵🏼

There’s a couple of investment strategies you could go down when thinking about buying farmland. As always, this is not financial advice and is merely for educational purposes.

Let’s start with the most obvious, but perhaps the one with the most barriers to entry too.

1. Buying Direct

1. Opting for an existing farm purchase through a sale-leaseback arrangement, where the current farmer continues operations and pays rent to the new owner. This method represents a relatively lower-risk and more hands-off approach to direct farmland investment. However, it might entail a higher initial land cost, leading to a comparatively lower cash yield.
2. Purchasing an existing farm or agricultural land and leasing it to a new tenant. This choice could potentially yield a higher investor return but necessitates more initial effort to identify a suitable tenant for the property.
3. Acquiring non-utilized land and converting it into cropland, pastureland, or an urban farm. A farmland conversion holds the potential for the greatest return, as it could involve a lower land purchase cost, leading to a higher cash yield and potential land value appreciation. However, this option demands the most extensive effort, involving land transformation, crop selection, and tenant sourcing.

Outside of direct, there’s some (much) easier routes to take, particularly if you’re just looking to wet your toes to begin with:

2. Purchase shares of specialty REITs focused on farmland

REIT stands for Real Estate Investment Trust and provide a relatively easy entry point.

Two REITs listed on public stock exchanges are dedicated to procuring farmland and leasing it to agricultural operators:

1. Farmland Partners (Listing: FPI): Among the largest publicly traded U.S. farmland REITs, Farmland Partners holds around $1.1 billion in assets as of mid-2019, encompassing 158,000 acres across 17 states. Over 100 tenants cultivate 26 diverse crop varieties on this land, with 57% consisting of row crops (corn, soybeans, rice, cotton) and 42% being permanent and specialty crops (almonds, avocados, wine grapes, non-tree fruit, vegetables).
2. Gladstone Land Corporation (Listing: LAND): With a portfolio of 111 farms spanning 86,534 acres in 10 states, valued at $876 million, Gladstone Land specializes in farmland utilized for cultivating nutritious produce like fruits, vegetables, and nuts.

Accessible to any investor with a brokerage account and adequate funds for a single share, these farmland REITs offer a cost-effective means of farmland investment.

Of course, as they trade on stock markets, they do carry some market-related risk.

Another REIT alternative is Iroquois Valley Farmland REIT, a publicly offered non-traded REIT that isn't traded on exchanges. It focuses on owning an organic farmland collection. This option however entails a substantial minimum investment exceeding $10,000, and share redemption is unavailable for a five-year period.

Crowdfunding platform focused on farming

In recent years, numerous companies have emerged to facilitate farmland investments.

However, the majority of these online crowdfunding platforms for farmland are exclusively accessible to accredited investors. Accredited investors possess a certain level of financial sophistication, typically defined by a high net worth exceeding $1 million (excluding primary residence equity) or a substantial income of $200,000 per year over the past two years, or $300,000 if married.

AcreTrader functions as a crowdfunding platform, granting accredited investors direct entry to farmland investments. Most offerings require purchasing 10 shares, equivalent to one acre of land typically valued between $3,000 and $10,000 per acre. Investors hold shares in a limited liability corporation (LLC) that possesses the legal title to the land.

FarmFundr operates as a crowdfunding platform, catering to accredited investors keen on investing in diverse opportunities, including farmland and agricultural facilities.

FarmTogether acts as an online marketplace for farmland investments, extending direct access to pre-vetted U.S. farmland opportunities to accredited investors. Investors can participate in specific farm investments or opt for a fund containing multiple farms.

Farmland LP specializes in purchasing commodity farmland and transitioning it into more valuable organic farmland. It provides accredited investors with a chance to engage in a private equity fund that has the potential to evolve into a Real Estate Investment Trust (REIT) and go public.

Steward Steward centers on sustainable farm investments through crowdfunding. It seeks to offer farmers capital through loans to enhance and expand their farms. The inaugural offering, Steward Farm Trust, will manage a portfolio of loans extended to farmers and will be accessible to all investors, requiring a minimal investment of $100.

🫣 Risks…

1. 🌎 Market Uncertainties: fluctuating commodity prices and dynamic market conditions introduce unpredictability in the agricultural sector, potentially influencing the profitability of farmland investments.
2. 🚨 Climate Shifts and Natural Hazards: the escalating effects of climate change lead to heightened vulnerability in agriculture, triggering more frequent and severe weather events like droughts, floods, and storms. These factors can have adverse repercussions on both farmland values and investment gains.
3. 📖 Political and Regulatory Dynamics: alterations in governmental policies, trade conflicts, and shifts in regulatory frameworks contribute to an environment of instability that can impact the feasibility of farmland investments.
4. 🛠️ Land Management and Operational Complexities: maximizing returns on farmland investments demands specialized knowledge, dedicated resources, and continuous attention to ensure effective land management and operational excellence.
5. 💰 Illiquid Asset - depending on the investment strategy e.g. if you purchases farmland directly, farmland can be seen as more illiquid than traditional assets, such as stocks and bonds.

🧰 Tools, resources and further reading:

• Great podcast from Money for the Rest of Us on the merits of farmland investing
• If you’re looking to delve into the statistics of farmland in more detail, then look no further than the US Department of Agriculture which has a a tonne of data you can sift through
• Detailed breakdown (and pros and cons) by the Impact Investor of various Farmland REITS

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Hope this has got you thinking...

Jason

DISCLAIMER: None of this is financial advice. Finbrain is strictly for educational purposes.

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