According to the U.S. Department of Agriculture (USDA), there are approximately 911 million acres of farmland in America. Of this, farmers and ranchers own about 61% of the land they use, while the rest is rented from third-party landlords. Investment groups, including retired farmers, hold the remaining 31% of America's farmland. Non-operating individuals or partnerships own 21%, and corporations, trusts, or other owners hold 10%.
Despite being one of the oldest investment classes, land as an investment is often overlooked and considered boring. However, in a world filled with unpredictability, sometimes the allure of the "boring" becomes quite appealing. In this resource, we will explore why investors and individuals are increasingly choosing to invest in farmland.
What are the benefits of investing in farmland?
There is a reason why billionaires such as Bill Gates are investing heavily in farmland and agriculture- farmland investments have a long history of producing solid returns.
Rising Farmland Values
The value of agricultural land is steadily rising across the United States, reaching an average value of $4,080 per acre in 2023.
Crops and Land Leases
Farmland owners can also earn income from crop yields or cash rental payments when they lease their land to other farmers. According to the National Agricultural Statistics Service (NASS), the average rent rate for cropland is also steadily rising and has increased an average of $7 per acre.
Low Volatility
Farmland is known for its relative stability compared to other investment asset classes. In fact, there have been instances where the volatility of the S&P 500 has been more than double that of farmland. Surprisingly, farmland has even exhibited lower volatility than commercial real estate, bonds, and gold.
Diversification
Farmland investments provide diversification for portfolios. Agriculture as an industry is not closely correlated with stock prices, meaning that it can help balance a portfolio and reduce overall risk.
Inflationary Hedge
Investing in farmland serves as a valuable safeguard against inflation. This is due to several reasons. As inflation rises, so do the prices of commodities such as wheat and corn. Consequently, the increase in crop prices can lead to higher returns on farmland investments. Moreover, the low correlation between farmland and the stock market, coupled with its tendency to appreciate in value, further solidify its position as a natural hedge against inflation.
What are the risks associated with investing in farmland?
While there are many potential benefits to investing in farmland, like any investment, there are also risks involved. Here are a few factors to consider before making an investment in farmland:
Weather and Natural Disasters
Farming is heavily reliant on weather conditions, and natural disasters such as floods, droughts, or wildfires can have a significant impact on crop yields. These unpredictable events can also damage the land itself, leading to potential losses.
Market Fluctuations
Commodity prices can be volatile, and they are heavily influenced by global market conditions. For instance, trade agreements or disruptions in supply chains can greatly impact the demand for crops and, in turn, their prices.
How can I invest in farmland?
When it comes to investing in farmland, there are direct and indirect options available. Direct investment involves purchasing and owning the land directly, allowing you to have full control and potentially generate income through farming or leasing. On the other hand, indirect investment allows you to invest in farmland through various financial instruments such as real estate investment trusts (REITs) or agricultural funds, providing an opportunity to diversify your portfolio and benefit from the potential appreciation of farmland values.
Buy Farmland Directly
Direct ownership involves buying farmland outright and managing it yourself or hiring a farm manager to oversee operations. This option allows for more control over the land and its potential profits, but it also comes with greater responsibility and risk. Prospective land buyers can purchase land that is currently being used for agricultural purposes, or they can purchase land that is not currently used for farmland and convert it into farmland.
Purchase Farmland REITs
Indirect ownership involves investing in a farmland investment trust (REIT), which pools funds from multiple investors to purchase and manage farmland properties. These trusts typically focus on specific types of land, such as row crop or permanent crops like vineyards or orchards, allowing for targeted investments based on individual preferences. Two publicly traded REITs focused on acquiring farmland and leasing it to farmers are Farmland Partners (FPI) and Gladstone Land Corporation (LAND).
Invest in Farmland Crowdfunding Platforms
Farmland funds are another indirect investment option that allows individuals to invest in a portfolio of different types of farmland without owning the land directly. Crowdfunding platforms allow investors to pool their funds to purchase farmland, with the platform itself handling all aspects of managing the land.
Leveraging Data for Smarter Investments
Investing in farmland can provide numerous benefits, including potential for solid returns, diversification for portfolios, a hedge against inflation, and low volatility. However, it is essential to thoroughly research and consider the potential risks associated with farmland investments and choose a suitable investment option based on individual goals and risk tolerance. With proper planning and due diligence, investing in farmland can be a valuable addition to any investment portfolio. So, it is no wonder that this "boring" asset class is now gaining more attention from investors worldwide.
If you're interested in purchasing farmland, LandGate can help! View listings for farmland for sale across the country for free today, or leverage our LandApp tool to view listings and analyze the suitability of any U.S. parcel for farming:
