Key points
- Farmland can provide investors with an additional source of risk and return.
- Investors can invest in farmland via various methods.
- Farmland investing includes risks, such as illiquidity, regulatory constraints and environmental factors.
Ultra-high-net-worth individuals often diversify their portfolios by exploring alternative assets beyond stocks and bonds.
A case in point is billionaire Bill Gates, who in 2020 grabbed headlines by emerging as the largest private farmland owner in the U.S. In less than a decade, Gates amassed more than 269,000 acres of farmland spread across 18 states.
But the allure of farmland investing isn’t exclusive to the billionaire club.
Contrary to popular belief, opportunities in this sector are more than just reserved for the elite. Retail investors, too, have an array of avenues to delve into the world of farmland investments.
Ways to invest in farmland
Just as the realms of commercial and residential real estate offer varied avenues for investment, so does the domain of farmland.
For prospective farmland investors, the primary options to consider are direct private investments, farmland real estate investment trusts (REITs), and online syndication and crowdfunding platforms.
Direct private investments
Investing directly in farmland offers an unfiltered experience of owning and potentially managing agricultural land. You can adopt several approaches when pursuing this investment route:
- Purchasing farmland outright: The most straightforward method involves identifying a piece of farmland for sale, assessing its potential for profitability and buying it. This approach allows the investor full control over the land, including decisions on what crops to grow, when to harvest and whether to lease the land to farmers.
- Leasing to farmers: Once an investor owns a piece of farmland, they might choose not to farm it themselves. Instead, they can lease it out to experienced farmers and collect rent. This passive approach appeals to those who want the benefits of land ownership without the operational hassles of farming.
- Partnering with an operating farmer: Some investors prefer a more collaborative approach. They might partner with an experienced farmer, wherein the investor provides the capital for land purchase and the farmer manages the operations. Profits in such a setup are typically shared based on a preagreed ratio.
- Land auctions: Auctions can be a viable way to acquire farmland. They offer potential investors the opportunity to bid on properties that might not be available through traditional real estate listings. But this method requires a keen understanding of the land’s value and the local farming community to make informed bidding decisions.
Delving directly into farmland investment often comes with its share of capital demand. According to the USDA, the average farm size in 2022 was pegged at 446 acres.
Given the USDA’s reported average value of $3,800 per acre in the same year, you can anticipate an initial investment of nearly $1.7 million or an average-sized farm. This figure, though a ballpark estimate, highlights the significant financial commitment required for direct private investment in farmland.
Beyond capital, investors must also be prepared to invest time, especially when navigating the diverse regulatory and legal landscapes that govern agricultural land ownership and operations.
Each region may have rules regarding water rights, land usage, tenant-farmer rights and environmental considerations. Ensuring compliance is paramount not only to avoid legal complications but also to ensure the sustainability and profitability of the investment.
Farmland REITs
Prospective farmland investors lacking the capital for a direct investment can opt for an investment in farmland REITs instead.
“REITs enable investors to gain all the benefits of commercial real estate without owning, managing or financing it,” said Abby McCarthy, senior vice president of investment affairs at Nareit. “They offer investors exposure to a wide range of properties, including specialty properties like farmland.”
Farmland REITs are corporate entities that own, operate or finance income-producing agricultural real estate. They aggregate capital from multiple investors and use these funds to purchase and manage agricultural lands.
These REITs then typically lease out the land to farmers and distribute the rental income, after expenses, back to shareholders as dividends.
Shares of these REITs trade on exchanges like any other stock and can be bought and sold via most brokerage platforms.
Instead of the significant capital outlay required for direct land ownership, investors can buy shares in a REIT for a fraction of the cost, thereby gaining exposure to the farmland market. Investing in a farmland REIT provides exposure to the agricultural land market without requiring direct land ownership or management.
“Like other REITs, farmland REITs can provide a steady stream of dividends, competitive total returns and portfolio diversification and have historically offered protection against inflation too,” McCarthy said.
Unlike purchasing a single piece of farmland, investing in a REIT also exposes one to multiple farms, often across different regions and crop types. This can provide better diversification and spread out risk more broadly.
Two of the more notable farmland REITs investors can currently buy shares of include:
- Gladstone Land Corporation (LAND): An established player, Gladstone specializes in acquiring and leasing farmland for row crops, berries and certain vegetables.
- Farmland Partners (FPI): This REIT focuses on acquiring primary row crop land, which includes grains and cotton. Their portfolio spans across multiple states, providing diverse exposure for investors.
Online syndication and crowdfunding platforms
Online crowdfunding platforms have emerged as a popular tool for those keen to explore farmland investments. These platforms act like digital marketplaces, showcasing a range of farmland projects that need funding.
As an investor, you get access to various farm investment opportunities after signing up. If a project resonates with you, you can allocate some of your money. Upon reaching the set funding target for a project, the platform consolidates all the collected funds.
This lump sum is then channeled into acquiring or developing the identified farmland. The responsibility of managing the farm falls on the platform, either directly or through arrangements with experienced farmers.
Profits generated from these ventures, such as rent from tenants or value appreciation, are subsequently distributed among the investors proportionate to their initial contribution.
But as straightforward as this may sound, there are nuances to consider. For starters, there’s typically a minimum investment threshold that might vary from platform to platform.
Liquidity is another factor; once you commit your funds, there could be a stipulated period during which withdrawing or accessing them might not be feasible.
And, of course, the platforms do charge for their services. This could come in ongoing management fees or even a percentage of the profits.
Some notable farmland syndication and crowdfunding platforms include American Farm Investors, acretrader, FarmFundr, FarmTogether and Harvest Returns.
Best places to invest in farmland
Determining the best places to invest in farmland is often a nuanced affair. The ideal location largely hinges on individual factors like an investor’s risk tolerance, objectives, financial standing and domain expertise.
Just as it’s challenging to predict which stock will soar tomorrow, pinpointing future hotspots in the farmland market ahead of time is no simple task.
Nevertheless, historical trends can offer a glimpse into regions with strong performance. For instance, the 2022 USDA report provides insights into which states witnessed robust growth in farmland real estate average value per acre from 2021 to 2022.
Among the standout states, Kansas led the pack with an impressive 25.2% growth year over year. Not far behind, Iowa surged by 21.4%, Nebraska rose by 21%, South Dakota posted an 18.7% gain and Minnesota rounded off the top performers with a 17.4% return.
In terms of larger multistate regions, the Northern Plains took the lead with a cumulative growth of 19.8%, closely trailed by the Corn Belt, which registered a 14.9% uptick.
But while these statistics might suggest recent profitable ventures in these regions, it’s important to remember that past performance doesn’t guarantee future results and that there are other factors to consider with farmings, such as crop yields per acre and productivity, to name a few.
Pros and cons of investing in farmland
Like any other investment avenue, farmland presents its unique blend of potential returns and risks. As investors navigate this landscape, they must balance these factors to determine whether such an investment aligns with their financial goals and risk appetite.
Pros
- Benefiting from long-term trends: As global populations continue to rise, so does the demand for food. With ongoing industrialization in many parts of the world, farmland could be strategically positioned to capitalize on these macroeconomic shifts.
- Inflation protection: Farmland often acts as a hedge against inflation. This is because its value is linked to agricultural commodity prices, which tend to rise when inflation accelerates.
- Low correlation to traditional assets: An attractive feature of farmland investments is that their performance typically isn’t closely tied to that of mainstream assets like stocks and bonds. This means they can provide diversification benefits in a broader investment portfolio.
Cons
- Illiquidity: One of the primary drawbacks of investing directly in farmland is its illiquid nature. Unlike stocks or bonds that can be quickly sold, offloading a piece of land can be time-consuming and might not fetch the desired price.
- Environmental risks: Managing farmland is subject to a host of environmental challenges. Factors such as droughts, floods, pests and disease can drastically affect crop yields and profitability.
- Regulatory risks: Additionally, changes in environmental regulations, water rights issues and other legislative measures can further complicate operations and affect returns.
Is farmland a good investment?
Determining whether farmland is a good investment is a layered question. At its core, the profitability of any investment, farmland included, revolves around the buy-low, sell-high principle: the difference between your purchase and sale prices. But that’s only part of the story.
Much like other forms of investment, the appeal of farmland is contingent on various personal factors. These include your investment goals, how well-acquainted you are with the agricultural sector, the duration you’re willing to hold the investment and your risk appetite.
Broadly speaking, farmland could be a viable investment option for an informed investor who has already diversified their portfolio with more conventional assets like stocks and bonds.
If you’re comfortable with the inherent illiquidity of such assets, envision holding onto them for an extended period ranging from a few years to even a decade. You also need to possess the acumen to navigate the complex legal and regulatory requirements landscape. Farmland might be a suitable addition to your investment portfolio.
Frequently asked questions (FAQs)
According to the USDA’s 2023 report on farm real estate value by state, if you’re looking purely at cost on a dollar-per-acre basis, New Mexico emerges as the most economical option at $610. Following closely behind are Wyoming at $880, Nevada at $1,060 and Montana at $1,070.
But investors should consider factors beyond just price, such as soil quality, water availability and local agricultural markets, before making a purchase decision.
According to the 2023 USDA report, the average cost of farmland per acre across the U.S. stood at $4,080. It’s important to note that this figure represents a national average, and actual prices can vary significantly from state to state and region to region based on factors like land quality, location and demand.
The ways to profit from farmland largely hinge on how you invest in it.
One primary method is capital appreciation, where you purchase and later sell assets like private land, shares in crowdfunded projects or farmland REITs at a price higher than your initial investment. On top of that, you can also generate consistent income by leasing out private land to farmers or receiving dividends from a farmland REIT.
