Real estate is one of the most popular alternative investments. When most people think about real estate, they imagine rental homes, office buildings, and storage units.
But what about farmland?
Some of the world’s wealthiest people use farmland to diversify their portfolios, and for good reason. Fertile crop lands are known for producing returns that outpace most assets while offering reduced volatility.
Of course, as with any other investment there are risks to consider. Bad weather can cause significant reductions in returns, the cost of operating a farm can become intense quickly, and if you run a farm yourself, the work is arduous, to say the least.
So, is farmland a good investment when you consider all factors?
Is Buying Farmland a Good Investment?
There’s no question that farmland is an attractive investment option for the right buyer. The key is research and ensuring that you get a quality deal. There are several reasons farmland makes a good investment:
1. Farmland Returns
Regardless of what you’re investing in, a strong investment is one that creates strong returns. Let’s face it, you’re not investing for the sheer purpose of owning assets; you’re investing as a means to achieve financial stability, increase your net worth, or set up a comfortable retirement. Life isn’t all about the money, it’s your investments are all about the benjamins.
So, how does farmland stack up?
You might be surprised that farmland has been one of the best returning asset classes for the past 20 years, producing a 12.24% average annual return according to AcreTrader. That’s impressive by any benchmark. Just look at some of the average annual returns of more traditional investments:
- Stocks. The S&P 500, the flagship stock market benchmark for the United States, has generated annualized returns of about 10.5% over the past several decades.
- Gold. According to Statista, gold — one of the world’s most prized safe-haven investments — generates average annual returns of around 10.61%.
- Silver. According to data from Macrotrends, silver saw annualized returns of around 10.33% from 2009 through 2020, although there was quite a bit of turbulence throughout this period.
Of course, fixed-income investments like bonds are known for producing even lower returns.
So, when looking at the long-term return rates of various investment vehicles, it quickly becomes clear that the more than 12% average annual return enjoyed by farmland investors in recent decades is impressive.
2. Land Values Are Expected to Continue Rising
What makes land as an asset class so special?
Although it may seem as though land is abundant today, that’s far from the case, and the global supply of real estate for sale continues to shrink. An increasing global population means more demand for crops and a growing demand for land, both for farming and living on.
Stating the obvious, there’s no way to create more Earth; our planet is only so big. By the law of supply and demand, the finite supply of land itself and the fact that demand is increasing by the day suggest price appreciation will occur over time, meaning that farmland values must rise.
Land is in finite supply. Sure, the Earth is a decent-sized planet, but it’s not growing!
As the global population continues to grow, new homes will need to be built and farms will need to supply more food for people to eat. As this trend continues, land values are only likely to continue on the upswing, leading to significant growth in prices.
3. Farmland Provides Passive Income
Price appreciation isn’t the only way to make money with farmland investments.
Farms are active operations that make money each and every year. As long as you own farmland, you have the opportunity to earn reasonable returns by growing crops on the land.
Of course, running a farm can be expensive and time consuming, but as we’ll discuss shortly, there are many ways to go about investing in farmland. Unless you’re buying the physical land and working it yourself, the farming operations are handled by a third party.
By doing your due diligence and investing in farmland that’s best for high-value crops, you’ll have the ability to generate meaningful passive income through your investments. However, there are a few factors that influence a farm’s passive income:
- Different Crops Have Different Values. Paying close attention to the crop produced on the farm you’re investing in is crucial. For example, 1,000 pounds of pistachios is far more valuable than 1,000 pounds of corn.
- Different Crops Take Longer to Mature. Although pound for pound pistachios are more valuable than corn, corn matures far faster than pistachios. If you’re looking to generate immediate income, it’s best to invest in farmland known for producing crops that mature quickly.
- Environmental Factors. Finally, environmental factors will play a role in the cost of operating a farm, whether you own the entire farm or shares of it. For example, a farm in a region known for high levels of rain will be less expensive to water than one in a dryer climate. Weather factors like severe temperatures or varying rainfall amounts can greatly impact a farm’s yield in a given season.
4. Food Demand Points to a Strong Long-Term Investment
Once you get into farmland ownership, whether directly or indirectly, you may decide you’ll never sell your holdings, and for good reason. Food demand is growing sharply for two reasons.
First and foremost, the global population is growing quickly and that growth has been accelerating. This trend is expected to continue for the foreseeable future. After all, more babies today means more weddings in 20 years and more families having more babies. According to SeafoodSource, about 2.3 billion people will be added to the global population by 2050, requiring 70% more food then than the global population requires now.
That growth in demand for the crops produced on farmland means the revenue generated per acre is likely to climb dramatically over the coming decades. As a result, there’s a strong argument that farmland isn’t just a strong investment in terms of price appreciation, but that it’s worth holding onto for the long run in order to reap the benefits associated with feeding the world.
Pros and Cons of Farmland as an Investment
Every asset class has its strengths and weaknesses, and farmland is no different. Here are the major advantages and disadvantages of investing in farmland.
Pros of Investing in Farmland
There are several reasons to consider investing in farmland. It has the potential to generate strong, relatively stable returns while making you feel good about what your investment dollars are supporting. Here are some of the biggest benefits to farmland investments.
You often hear stories or read ads about returns of 100% or more on an annualized basis. The truth is, those types of returns are ridiculously difficult to achieve, if not impossible in most cases. The general rule of thumb is that if you’re producing 10% or more per year in your portfolio, you’re doing very well.
Farmland is more than capable of doing just that.
As mentioned above, the average return on a piece of farmland over the last couple of decades has been about 12.24%, outpacing stocks, bonds, gold, and silver. If money talks, farmland is definitely doing the talking.
Most investments that tend to outperform some of the most watched benchmarks come with incredibly high levels of volatility, meaning that the assets are known for wide swings in value. While land does increase and decrease in value, it generally does so at a relatively steady pace.
This lack of volatility is a big draw for many investors, especially the risk-averse crowd.
The Feel-Good Effect
There are tons of different things you can do with your investment dollars — some a bit more noble than others. Investing in farmland is a venture that’s both profitable and valuable to society. You’ll know that your investments aren’t just making money for you, they’re playing a role in making it possible to meet the growing demand for food, a basic humanitarian need.
Those looking for income from their investments can benefit greatly from investing in real estate. Rental properties provide investors with rental payments, but farmland makes passive income from the crops it produces.
After all, when you own a farm, you’re not just holding an asset that was designed to sit idle and await price appreciation. You’re investing in an asset that’s made for making regular annual income sometimes literally grow on trees.
Cons of Investing in Farmland
Sure, there are plenty of reasons to consider investing in a farm, but there are also risks to consider. Some of the most significant risks include:
The amount of money you make from crops on your farm will depend heavily on commodity prices. Should commodities fall in value, there’s a good chance your farmland investments will underperform.
It’s far easier to sell a share of Apple stock than it is to offload a piece of land. When investing in farmland, you may be stuck with your investment for years before a buyer comes along.
Poor Weather Conditions
From time to time, severe weather or an unexpectedly harsh winter or summer will lead to lower-than-expected yields, directly affecting the return on investment you’ll experience.
High Cost of Exposure
Buying farmland isn’t cheap, and with limited inventories available, it’s only getting more expensive. As a result, farmland investments are usually only available to those with a relatively high value investment portfolio.
How to Invest in Farmland
As mentioned above, there are quite a few ways to go about investing in farmland. Some of the most common include:
Buy Farmland Directly
The most obvious way to go about making a farmland investment is buying the land outright. To do so, you’ll find yourself searching websites like Zillow and Realtor.com for agricultural land for sale. Unfortunately, you’ll also find that your options are limited.
According to the U.S. Sustainability Alliance, 98% of farms in the United States are owned by families, representing about 86% of U.S. farmland production. Much of the remainder of the farmland is held by institutional investors and high net worth individuals. Even Bill Gates owns 242,000 acres of cropland in 19 different states.
As a result, the supply of agricultural properties available for purchase is quickly diminishing, with the vast majority already owned by a holder that’s not interested in selling. However, with a bit of research, you may be able to find a worthwhile property.
Invest In Farming ETFs
One of the simplest and most common ways to access farmland investment is to invest in exchange-traded funds (ETFs) dedicated to farming. ETFs are a popular type of investment vehicle that pool money from a large group of investors to buy assets according to the fund’s prospectus.
Farming ETFs invest in stocks that represent farming companies or in commodity futures. For example, one of the most popular is the Invesco DB Agriculture Fund (DBA), which invests in a wide range of agricultural futures from cotton to soybeans.
Invest In Farming REITs
Another way to go about making investments in farms is to invest in farming-focused real estate investment trusts (REITs). REITs are funds that pool investment dollars from a large group of investors, much like ETFs. However, farmland-focused REITs use those investment dollars to purchase and maintain farmlands on behalf of shareholders.
By investing in these companies, your investments are supporting large corporations that have farming down to a science. For example, one of the largest farming REITs is known as Gladstone Land (LAND). The fund owns land in 14 states and actively produces returns for its investors through farming operations.
Be Part of the Crowd
Crowdfunding has become a popular way for companies to raise the money they need, and many of those companies are farmers. In fact, there are several websites and apps dedicated to connecting retail investors to farmers in need of funding. The rise of real estate crowdfunding has made it easy for everyday investors to participate in farmland investments.
When taking advantage of these investment opportunities, investors are generally granted a percentage of ownership in the farms they support. So, when the farmer earns money from the crops produced, the investors will each receive their share of the profit.
Where to Invest in Farmland
One of the biggest obstacles to farmland investing is figuring out where exactly to go to make the investments. These days, there are several options to consider.
Real Estate Listings
If you’re interested in buying physical land and managing the farm on your own, you’ll want to go to real estate listing websites like Zillow, Realestate.com, and LandWatch.com. These websites have a central focus on selling real estate, and most have sorting options that allow you to browse land-only listings rather than residential properties.
Before purchasing a physical piece of land for farming, make sure that land is zoned for agricultural use.
There are a few major challenges associated with buying land directly. Not only is the initial investment required going to be pretty hefty, farming isn’t easy work. That’s why many investors prefer buying land through crowdfunding platforms.
By purchasing land this way, the farming operations aren’t your responsibility. Instead, they’re the responsibility of the farmer who’s selling shares of the land. Moreover, crowdfunding platforms allow you to invest in farmland with less out-of-pocket cost. Although most platforms have minimum investments ranging from $10,000 to $15,000, that’s far less than you’d pay to own a farm and the equipment required to operate it.
Crowdfunding platforms geared toward farming are essentially in the business of connecting farmland partners that are interested in forming long-term, profitable partnerships. Some of the most popular platforms include AcreTrader, FarmTogether, and FarmFundr.
Unfortunately, however, the vast majority of crowdfunding platforms for farmland are reserved for accredited investors with high incomes or high net worths. It can be harder to find opportunities that allow investors with more modest means to buy into shares of farmland.
Buy Farming Stocks, ETFs & REITs
For most investors, the best way to go about investing in farmland is to buy farming stocks, ETFs, or REITs. These investments are accessible to everyone, and the minimum investment required equates to the cost of a single share of the company, fund, or trust, which is generally under $100.
You can purchase these assets with any popular broker like Charles Schwab, E*Trade, and TD Ameritrade, among a long list of others.
All told, farmland is a great asset to add to your investment portfolio. While there are hurdles to purchasing physical farmland, whether directly or through a crowdfunding platform, it’s easy to gain access to these assets in the stock market by purchasing stocks, ETFs, or REITs focused on farming.
As is the case with any investment, it’s always important to do your due diligence. That’s true regardless of the type of farmland you’re planning on buying or whether you plan on investing in it directly or indirectly. Research is the foundation of any strong investment decision.