Source: USDA Land Values 2021 Summary
Real estate has been one of the safest and most reliable investments for decades. Usually, when people discuss this market, they’re discussing commercial or residential property as the biggest cities continue to sprawl outward and create miles of suburbia.
Despite it holding many beneficial qualities for even the most low-level investor, the farmland market is often overlooked.
The attraction to farmland is understandable; it’s a tangible asset that you can see, touch, and feel. Unlike stocks or even gold, farmland is something that people need and will always need for sustenance.
Arable land is inherently scarce–there is a finite amount of it available in the United States–and the food demand continues to rise as the population grows. Yet, it can still sometimes be difficult to conceptualize the process of investing in it.
There are real roadblocks in the way for many investors. The main is that, unless you are buying the property directly (something we’ll get into further down), it can be difficult to invest solely in the land and not the operation.
Given that immediate challenge, it can be easy to turn to something with a little more media coverage or modern appeal and miss out on the chance to make real money off the land.
In this article, we’ll go over the various ways to invest in farmland, examine the benefits and disadvantages of having it in your portfolio, and walk you through how to decide on whether or not you want to get involved.
What is Farmland Investing?
What is farmland investing, exactly? Put simply, it is investing in the land which is used to grow crops or raise livestock through a variety of different ownership methods. This can be challenging, without knowing where to look. Luckily, we’re here to break down the most common avenues to pursue.
An Exchange-Traded Fund (ETF), is an investment security that tracks a particular market or index. In this case, no fund is completely made up of farmland ownership, meaning these ETFs track a particular agricultural commodity or sector.
For example, there is the Invesco DB Agriculture Fund (DBA), which tracks a broad range of agriculture commodities including corn (13.7%), wheat (13.6%), soybeans (12.99%), coffee (10.72%), and many others.
This kind of diversified portfolio allows investors to gain exposure to farmland and the agriculture industry as a whole, without having to do all of the research and legwork that comes with picking a particular crop or location.
It also is directly tied to the land itself, since the value of each commodity–crop prices–goes into the value of the fund. As land gets more and more scarce, ETFs such as this will likely become more and more popular.
As with any investment, it is important to do your research before buying into an ETF. Make sure you understand what the fund holds and how it will perform in different market conditions.
Also note that as with all ETFs, when you buy shares in one you are buying into a fund that is diversified across a large number of holdings. This lessens your risk as an investor, but it also means that any one company or sector represented in the fund will have a smaller impact on its overall performance.
Agriculture Mutual Funds
Similar to an ETF, a mutual fund is a collection of stocks and/or bonds. The advantage of a mutual fund is that the investor does not have to select the individual stocks or bonds.
Instead, the investor’s money is pooled with that of other investors and professionally managed. This allows the fund manager to purchase a variety of assets to spread out risk and provide a more diversified investment.
As you might expect, agriculture mutual funds invest in companies that are involved in agriculture-related businesses. This could include anything from farming and ranching to food production and processing.
The appeal of an agriculture mutual fund is pretty straightforward: by investing in these companies, you’re betting on the continued growth of the agriculture industry. This could be a good strategy if you believe that population growth and increased demand from developing countries will result in more profits for agricultural businesses.
Real Estate Investment Trusts
If you would rather invest in the land itself, there are also Real Estate Investment Trusts (REITs). A REIT is a company that owns, manages, and/or finances income-producing real estate. REITs are bought and sold on major exchanges, just like stocks.
For example, Gladstone Land Corporation (LAND) is a trust that owns approximately 113,000 acres across 15 states, (along with 45,00 acre-feet of water in California). It was founded in 1997and currently has a market cap of nearly 800 million.
The nice thing about REITs is that they provide much more liquidity than investment in a single property, meaning you can buy and sell shares quickly if needed. And, as with any stock, there is the potential for capital gains (or losses).
One downside to farmland REITs is that they may not be as “tangible” as some investors would like. For example, you can’t go out and inspect the land Gladstone owns in California just because you own a few shares. For some, this doesn’t quite scratch the itch of actual real estate investment, with a property that you can visit yourself.
Similarly, there are some online platforms that aim to change the way farmland is bought and sold in the first place. Unlike a farmland ETF or a REIT, these are more hands-on ways to invest in farmland, as you are directly investing in the land itself.
Their method allows investors to buy into a specific farm entirely online while handling the entire management of the property. They yield an annual cash dividend somewhere between 3-5%, while also allowing you to make money through land appreciation.
AcreTrader suggests that an investor should be prepared to hold for five, ten, or even 20 years, and cautions against those who will want to quickly resell. It can also include a high initial investment, making it out of reach or extremely risky for some investors.
The lack of diversification can put you in a tough situation should the value of your farm decrease for any reason, especially given the illiquidity of the platform.
Another leading example of this is FarmTogether, which can boast an average annual return of 11% over the last three decades. That includes the actual income generated through dividends and the appreciation of the land itself.
They are also certified through Leading Harvest, a farmland watchdog that ensures sustainability and environmental responsibility.
That leads us to direct purchasing of farmland, which can be an equal mix of reward and risk. Though the price of farmland has appreciated at a rate above the rate of inflation over the past several decades, it’s not without volatility. What goes up can always come down, after all.
Still, if you want to know exactly how good an investment farmland ownership can be, look no further than the largest private owner of farmland in the United States: Bill Gates.
In 2021, he owned more than 269,000 acres of farmland and that number continues to grow with purchases like the one in North Dakota, where a 2,100-acre potato farm was sold to an entity associated with Gates.
If you have the means to purchase a farm outright, it may be one of the more secure long-term investments you could make. Not only do you have complete control of what happens on the land, but you can also generate income from rents and leases paid by tenant farmers or through agro-tourism ventures on your property.
You may even come to the realization that you enjoy managing parts of the land yourself, and get a kick out of watching things grow!
Why Invest in Farmland?
All of the ways described above will lead back to one question: is farmland a good investment? There are several reasons why someone might decide to go after arable assets, such as:
- Inflation Hedge
- Rise of Land Value
- Portfolio Diversification
- Stock Market Correlation
- Food Security
Let’s take a closer look at each one, and dig into why it could benefit you.
Owning farmland or investing in agriculture can essentially be inflation-proof, as the price of food will generally go up at the same rate. The cost of production may also increase, but farmland will still hold its value due to its other uses (e.g., development, conservation).
In today’s period of hyper-inflation, investing directly in farmland can mean an even better shield than in trusts or REITs that can perform poorly in those situations.
Rise of Land Value
As any farmer will tell you, land values have been rising steadily for decades. In 2007, the United States Department of Agriculture found that farmland was worth, on average, just over $2,010 per acre. By 2021, that number had risen to nearly $3,400.
The difference was felt most in cropland, which has experienced a much steeper rise over the same period when compared with pasture land.
Investment then, seems like an extremely safe bet, especially when you consider that the global population is only going to continue to grow. The more people there are in the world, the more need there will be for food, and thus, farmland.
Once again, given its relative scarcity and never-ending demand, the value is only expected to rise further and further in the future.
Because of that stability, land ownership can be a very enticing addition to any portfolio that is otherwise invested in riskier, high-yield offerings. By adding a low-correlation asset to your mix, you can help protect yourself from devastating losses if the rest of your portfolio takes a tumble.
In fact, during the global financial crisis of 2007-2008, farmland values increased in many regions around the world. While stocks and other traditional investments were tumbling, the land was still providing a valuable and stable place to park one’s money.
Stock Market Correlation
It is exactly that low correlation that is so appealing in farmland investment, at least in the right scenario. A study from Purdue University found an inverse correlation between farmland and both bond yields and housing, meaning that when those markets go down, farmland prices tend to go up (and vice versa).
This makes farmland a good investment to balance out a portfolio that is too heavily weighted in one direction. Given the overall land value increase we’ve seen over the last several decades, it can essentially serve as a short-term buffer to protect against economic downturns, while still providing long-term growth. That’s an attractive investment.
It is sometimes hard to think about, but the final reason why you might want to invest in farmland is for food security reasons. If something happens where we have a major food shortage (a natural disaster, war, etc.), the farmland you own will be one of the few assets that will still be in high demand.
Risks of Farmland Investment
Despite all the potential positives, farmland investment comes with its fair share of risks.
- Price volatility: The prices of crops and farmland can be very volatile, making it difficult to predict returns. They can also fluctuate based on factors like weather conditions and government policy.
- Limited liquidity: It can be difficult to sell farmland quickly, or at the price you want if you need to cash out your investment.
- Lack of information: Farmland is often a complex asset class with many different factors affecting its value. This can make it difficult to assess risks and opportunities properly.
- Difficulty in management: Managing a farm can be time-consuming and challenging, particularly if you’re not familiar with farming practices. You may need to hire someone else to do this for you, which could add to your costs.
- Environmental risks: Agriculture can have a negative impact on the environment, for example through soil erosion, water contamination, and loss of biodiversity. If you invest in farmland, it’s important to be aware of these risks and how they might affect your investment.
As with any investment, it is important to understand that this is not a risk-free enterprise. But there are some ways to protect against disaster and avoid some potential mistakes.
Simply put, don’t overextend. If you can’t afford to lose the investment, don’t do it–even in something as stable as real estate or agriculture. Otherwise, there are some other simple tips you can follow to help mitigate the risk when farmland investing:
Do your research
It’s important to have a good understanding of the factors affecting farmland prices and returns before investing. This includes studying local markets, understanding the risks associated with different types of crops, and assessing the impact of climate change.
Diversify your portfolio
Don’t put all your eggs in one basket! Investing in a range of assets – including farmland, stocks, bonds, and commodities – can help reduce your overall risk.
Use professional advice
Seeking expert advice can help you make informed decisions about investing in farmland and managing any associated risks. Make sure to speak with actual farmers to get some sense of how their industry works before investing.
Stay up to date with news and policy developments
Things like changing government policies or weather conditions can have a big impact on farmland prices and returns. Keeping up to date with the latest news can help you make better investment decisions.
Choosing a Farmland Investing Method
So you have done your research, talked to farmers about the industry, and decided you want to get involved in farmland investing. What is the best option for you? An ETF? Mutual fund? Direct purchase?
Here are a few things to consider:
- What is your investment goal? – Are you looking for short-term or long-term gains? Are you looking to produce income from the farm or are you looking to sell in the future for a profit?
- What is your risk tolerance? – Farmland can be a very stable and predictable investment, but it is not without risk. How comfortable are you with the possibility of losing money on your investment?
- What kind of management do you want/need? – Some investors prefer to own farmland that is managed by a professional agribusiness company, while others are more comfortable managing the property themselves.
- What is your budget? – It is important to be realistic about how much money you can afford to invest. Buying a small parcel of land in a desirable location may cost more than buying a larger plot of land in a less desirable area.
- What is your time commitment? – Are you willing and able to spend time visiting the property, monitoring the crops, and dealing with any issues that may arise? Or would you prefer to have someone else do all of that for you?
Once you have answered these questions, you can begin to narrow down your options and find the farmland investing method that is right for you.
In general, ETFs and mutual funds provide the lowest risk, as the investor is not directly purchasing the property. These options can be good for those who want to invest in farmland but don’t have the time or knowledge to manage it themselves.
Direct purchase is a higher-risk option, but can also offer higher returns if done correctly. A REIT meanwhile can offer the best of both worlds, as it provides liquidity and lower risk than direct purchase, but also offers some of the benefits of owning the underlying property.
Farmland Investment Frequently Asked Questions (FAQ)
What is farmland?
Farmland is land that is used for agricultural production, most often crops or livestock.
Why invest in farmland?
- It’s a tangible asset that you can see, touch, and feel.
- It’s an essential part of human life and will always have value.
- The food demand continues to rise as the population grows.
How do I invest in farmland?
- Buy the property yourself
- Invest in a company that owns or leases farmland.
- Buy shares of an agricultural REIT, ETF, or mutual fund
What are the risks of investing in farmland?
- The value of the land may not rise as quickly as other types of investments.
- Legislation changes could drastically impact the value of the land or the price of the crop
- Environmental issues could change the short-term revenue of a farm
Is farmland a good investment?
It depends on your situation and what you’re looking for in an investment. Farmland can be a safe and reliable investment, but it may not have the same potential for growth as some other options.
Whether it is through an ETF, a mutual fund, an online marketplace, or just through purchasing a plot of land, farmland investing can be a great way to secure your portfolio for the future.
The key is to do your homework, understand what you are buying, and be comfortable with the risks associated.
If you are interested in getting into real estate but have decided that farmland isn’t the path you want to pursue, make sure to check out our full guide on real estate investing.
It provides the basics on how to get started in the industry and walks you through a step-by-step guide for building a credit score, generating a down payment, and qualifying for a mortgage. Even future farm owners could benefit!