Investing in farmland has historically been really hard. For most of American farming history, most farmland was owned by the people who farmed it. That’s slowly changing — and that creates opportunity.
Every year, there are fewer and fewer acres available in the U.S. for farmland. But the global population is growing. American farms feed people and animals all over the world — plus, more and more Americans are seeking to buy food grown close to home.
If you read that again, you’ll see the law of supply and demand at work: There’s less land but more demand for that land.
That makes farmland a valuable asset class. And that’s been the case for a long time.
Farmland has consistently outperformed other asset classes over time. Farmland returns have been positive every year since 1990, with average returns of more than 12% over the last 20 years.
No investment is without risk. But while most traditional investment assets are correlated with the stock market, farmland mostly is not. Its performance isn’t tied to stocks and bonds. Historically, volatility has been low. Farmland has helped prudent investors weather economic storms.
On top of all that, farmland may even be an inflation hedge. Farmland is a real asset that produces commodities. The yield is pretty much fixed, so over time, inflation means a higher income on the same amount of crop.
Interested? Here’s what you need to know to decide whether farmland is an asset class that might fit into your portfolio.
INVESTORS CAN OWN FARMLAND?
“Wait a second,” you might be thinking. “Back up. I’m not a farmer — but I can own farmland?”
Yes you can! According to AcreTrader, a platform that facilitates farmland investing, about 61% of farmland in the continental U.S. is owner-operated.
But not all that land is wholly owned by one farmer. Family members and neighbors often own land together — and often, one of those parties wants to sell a minority share. Investment groups like AcreTrader are attractive buyers because they’re willing to work alongside the other parties who want to retain their long-term ownership shares.
Another 8% of U.S. farmland is rented from an operator, meaning one farmer rents land out to another. Farmers often want to expand, but farmland doesn’t often change hands. That means renting extra acreage to expand a farming business. Other farmers who have available land may offer that acreage.
Farmers with empty fields aren’t the only ones who can fill that void, though. The last 31% of U.S. farmland is owned by non-operator landlords. Of those non-operators, about two-thirds are individuals or partnerships. The remaining owners are corporations or trusts, which are often set up for family members who inherit farmland but then move away.
In total, AcreTrader estimates, only about 5% of U.S. farmland is owned by professional investors. 5% in a market worth several trillion dollars!
That’s evidence of how high the barriers to entry are here. For most individual investors, buying a whole farm is too expensive. Good deals are hard to find, especially for those who don’t have much experience in agriculture. And the asset couldn’t be much more illiquid.
That’s where partnerships can help. AcreTrader is a great example. Their experts source and vet the deals. Then investors buy shares of land on AcreTrader, collecting rent from the farmer while the value of the land increases over time — similar to what you might expect with a house or apartment building.
WHAT MAKES FARMLAND A GOOD INVESTMENT?
Farmland is, at its heart, real estate, which means it earns income two ways: Cash flow and appreciation over time. Good farmland investments can generate competitive returns, consistent appreciation and pretty low levels of volatility.
According to the National Council of Real Estate Investment Fiduciaries (NCREIF), between appreciation and cash flow, farmland has generated annual returns approaching 12% for investors over the last 25 years.
According to USDA data, farmland values are remarkably stable. Land values have only declined during five of the last 50 years, including during the interest rate crisis of 1985-87. During those years, despite rapid depreciation, annual returns only fell to about -3% — because cash rent yields still topped 5%.
Farmland has a lower debt-to-equity leverage ratio than most real estate investments, too. During the crisis of 1985, that ratio peaked at about 29%. Today, it’s down to 14%, nearly a record low. In fact, most farmland is bought with all cash, meaning lots of investors carry no debt at all.
On top of that, farmland has extremely low volatility. That’s not only compared to other real estate investments or to the stock market, but even compared to gold.
Between the generous returns and the low volatility, farmland is relatively low-risk, high-reward. But we can better understand that using what’s called the Sharpe ratio, which is used to compare returns adjusted for volatility. According to Hancock Agricultural Investment Group, farmland has a higher Sharpe ratio than government bonds, large and small cap equities, and even private equity real estate investments.
Part of the reason farmland has such low volatility is that farmland values generally are not correlated with movements in the stock market. Think about how valuable that could be to your portfolio. If the markets take a dive — which they do about once a decade, although historically they have always recovered — you’ll have an investment that is relatively insulated.
That’s not to say farmland is without risk. Farmland is only as valuable as the value of its yield, and everything from local weather patterns to international trade disputes can affect that value. But those trends generally have little to nothing to do with what’s happening in the markets.
To take maximum advantage of farmland as a way to diversify your portfolio, consider investing directly in farmland rather than in a publicly traded REIT. We’ll get into this in more detail later, but REITs still tend to track the stock market.
Finally, farmland positions investors to take unique advantage of low interest rates. We know that the value of real assets, like land, usually moves inverse to interest rates — that is, when interest rates fall, the value of real assets rises.
That’s partly because the value of farmland is tied to commodity prices. When interest rates fall, commodity prices tend to rise, generating more returns per acre for farmers and higher cash rents for landowners.
All these trends — low volatility, lack of correlation with the markets, a variety of ways to invest — make farmland a unique and attractive investment. Farmland is relatively stable in recessions and performs well in low-interest-rate environments, and its long-term prospects are good. The risk is relatively low and returns are relatively high. You definitely can’t say that about every asset class.
DIVERSIFYING YOUR FARMLAND PORTFOLIO
Diversification is key to any investing strategy. It allows you to spread your risk around, so that if any one asset performs poorly, it doesn’t drag your whole portfolio down.
Farmland is no different. Every farm, region, and crop is unique, with their own benefits and drawbacks that change seasonally. Investors who own multiple farms can spread their risk out, across geographies, commodities, and tenants.
First, you can diversify farmland investments across regions to avoid weather-related risks. Weather patterns can vary within regions as small as counties, with farms on different ends of counties receiving different amounts of rainfall in any given season. Farmers who understand those patterns know how to plant at the most advantageous times, or how to give crops much-needed water at specific points in the growing season.
Extreme weather events are some of the most serious risks farmers face — floods, tornadoes, hurricanes, and droughts can wipe out crops and the profits that come with them. It’s unlikely that the same flood will affect two farms on opposite sides of a state. As the climate changes and extreme weather events become more common and more extreme, this kind of diversification will be even more important.
Farmland portfolios can also be diversified when it comes to crops. In any given year, weather can be more or less favorable to corn, rice, wheat, cotton, soybeans, peppers, you name it. Pests or invasive plants can arrive suddenly, and they could damage one crop but not another. The more crops your fields grow, the less likely it is that they will all have a bad year at the same time.
Plus, what ultimately drives crop prices is demand. If demand for one crop were to collapse — as has happened to soybeans several times in recent years as a result of U.S.-China trade policy — then owning farmland that produces multiple crops can help protect your portfolio.
Finally, farmers and farm tenants are a variable too. Some farmers are just going to be more successful than others. The more farmers you can lease land to, the more you can reduce that risk.
If we were talking about saving for retirement, we’d be talking about “owning the market” — trying to own mutual funds that include every stock in the S&P 500 or a similarly wide variety. We’re trying to do the same thing when it comes to farmland.
A diversified farmland portfolio would include farms in several different regions, which would mean variability in weather, crops, farming methods, and tenants. If it focuses on a single region, a diversified portfolio would probably include several different farms and farmers and a variety of crops.
That said, AcreTrader warns against putting too much emphasis on crop diversity. Corn covers about 35% of U.S. farmland, and soybeans cover another 30%. Add wheat, at 18%, and you’ve covered 83% of American farms. It would be very hard to diversify out of corn or soybeans — kind of like saying, as a multifamily real estate investor, that you were planning to diversify out of apartment buildings. It could probably be done, but it wouldn’t make a ton of sense.
One of the things I appreciate about farmland investing is the optionality — the fact that farmland can grow a variety of different crops. As climate change progresses, farmland in most regions will probably adapt. If a new crop becomes a key ingredient in animal feed or fuel, farmers can start growing that.
There’s no such thing as a risk-free investment. But for all these reasons, farmland is on the low end.
HOW TO START INVESTING IN FARMLAND
Investing in farmland isn’t easy. The knowledge needed to invest in this space is a huge barrier to entry, enough to keep most people out. Then there’s assembling investors, buying the land, collecting rent, and distributing it to those investors. That’s enough to limit farmland investing to a very wealthy, very knowledgeable few.
Investors can invest in farmland through three different types of ownership: Institutional funds, REITs, and outright ownership.
Farmland has attracted quite a bit of private equity investment in recent years — global farm funds raised more than $25 billion between 2007 and 2016, AcreTrader says. They estimate that more than $20 billion of that is invested in the U.S. market.
These agricultural land funds offer farmland to institutional investors like any other private equity deal. When private equity funds offer investments at scale like that, they develop opportunities to participate in large farm auctions and tons of leverage in farming and back office functions. But it also means more competition for those big deals, with multiple institutional funds showing up to bid.
Private equity might sound pretty good, but most of those funds have high minimum investments — as much as $1 million. They might also have 10-year lockups on investor funds.
Some of those funds have great teams, great approaches, and great returns. But they’re just out of reach for most investors.
REITs are starting to pop up in the agricultural land market too, and they’re growing — two publicly traded companies have been listed in the last five years. They are publicly traded companies that own and operate real estate, leveraging their debt to pay out dividends.
By investing in REITs, it makes it easier for investors to access farmland, but they don’t help investors escape the volatility of the stock market. There’s also little transparency.
Most commonly, farmland investors buy land directly. Typically, this process goes something like this:
- Find an attractive property
- Do due diligence on the deal
- Secure a loan and close on the property
- Find a property manager
- Find tenants (in this case, farmers) and negotiate leases and contracts
- Manage the business and all the complexities that come with it
There’s a reason most people only own one piece of real estate. It’s a lot of work! Buying and owning farmland is no different. In fact, it’s a lot harder, because there aren’t thousands of how-to books and blogs out there.
That’s why AcreTrader was created: To open up this asset class to more people. They take care of finding and vetting land deals and buying the land outright. Investors can buy in for as little as $20,000.
Investors pay a 0.75% management fee on a low-volatility, low-exposure investment with consistently high historical returns.
I’ve been very happy with my investments in farmland and think it deserves a place in everyone’s portfolio.
