I'm pleased to share with you a comprehensive guide to farmland investing by FarmTogether, a leading farmland investing platform and Financial Samurai sponsor. Not only is this article full of information, it will evolve with updated information as the landscape changes.
Farmland might be the world’s most promising untapped asset class, and the newest opportunity in real estate investing. Estimated at a value of over $2.5 trillion in the US alone (USDA), returns to farmland in the US have averaged over 10% for the last 47 years (Forbes).
In fact, from 1992-2016, farmland assets averaged an especially impressive 12% average return, outperforming real estate (NCREIF) at 8.7% and the Russell Stocks Index 3000 at 8.8%. Farmland also has a history of preserving capital in times of economic downturns, displaying an impressive resilience over the past two decades (NCREIF).
Still, it might come as a surprise that until recently, there haven’t been many options for non-institutional investors looking to get involved, aside from making the large investment and commitment needed to buy an entire farm outright.
Thankfully, this is changing. New technology-driven platforms ours, which was reviewed on the site earlier this year, are offering fractional investment solutions that make it possible for a wider range of investors to participate.
This innovative technology is being introduced to the market at a time of huge changes in farmland ownership – as well as in farming itself – and hints at an unprecedented opportunity for a wider investor audience to share in these promising returns.
Why Invest In Farmland Now?
1) Aging Population
For starters, the current generation of farmland owners in the US is aging – USDA data indicate 40% of US farmland is owned by people over the age of 65 (USDA).
According to the American Farmland Trust, roughly 370 million acres of farmland will change ownership within the next 20 years. Even if initial transfers of land are to the current landowner’s next of kin, much of that land will end up on the open market as younger generations increasingly opt to sell and pursue life away from agriculture.
2) Decreased Barriers To Entry
Meanwhile, barriers to entry to farmland ownership as a non-farmer are decreasing quickly. Across the US, renting farmland as a farm operator is already a common practice, and roughly 80% of rented farmland is already owned by “non-operator landlords” (USDA), or people who own farmland but are not actively involved in agriculture.
In fact, a large portion of those non-operator landlords are already-retired farmers, who have chosen to retain ownership of their land and rent it to other operators as a source of retirement income.
These trends are likely to continue, with generational transitions within farming in the US catalyzing the entry of more and more non-farmers into this asset class. As current farmers continue to retire, and either sell their land or ultimately leave it to their next of kin, more and more farmland will ultimately appear on the open market.
3) New Buyers
Meanwhile, it’s less and less likely that the new buyer will be another farmer – the increasing overall value of farmland during the last several decades has meant that the pool of farmers who can afford to buy, rather than rent new land, is shrinking (NPR).
For those who inherit land, if they don’t wish to continue being involved in farming, their smartest option is often to sell and capitalize on the last several decades’ worth of appreciation.
4) Positive Demographic Shifts
All of this is happening at a point in the history of civilization defined by two significant forces that will forever shape farmland assets:
1) Demand for food and other agricultural products is at an all-time high, and expected to continue increasing as the world’s population approaches 10 billion by 2050
2) high-quality farmland, meanwhile, is an increasingly scarce resource. More land is lost from agriculture to development every year – nearly 31 million acres were converted in the US from 1992-2012 alone (AgWeek).
Further, climate change will further exacerbate this scarcity of good farmland. Climate change will place a heightened demand on water and soil resources. There may also be changes to weather that make crop production riskier and confined to smaller suitable regions.
Given the above trends, investing now in high-quality farmland promises to be a great source of passive income.
Let’s explore this opportunity in greater depth, how it compares to traditional real estate investing, and ways to get involved in building passive income through farmland investing.
How Do Farmland Investments Generate Returns?
You may already be familiar with how to invest in other types of real estate – what to consider when comparing properties, evaluating risk, and choosing between active and passive income options.
Farmland is comparable to commercial real estate in terms of how it generates returns, and in terms of the types of factors to evaluate when sizing up any particular opportunity. It does, however, have specific characteristics that can determine the degree of success of your investment.
Two Ways To Generate Farmland Returns
As with real estate, there are two main mechanisms by which equity investments in farmland generate income: 1) appreciation of the value of the land and 2) income derived from the operation of the farm.
Finding value from appreciation of farmland relies on buying a property at a competitive price, making material improvements to the land, and selling it or a profit after a period of time. In farmland’s case, an appropriate hold period is usually between 5 and 10 years.
Though conventional real estate does see investors sometimes employ a shorter-term strategy that is commonly referred to as “flipping” – buying and quickly re-selling a property – to capitalize on it being undervalued at its original price – there is much less use of this strategy in farmland investing.
Most US farmland has been in operation for generations, and therefore prices are often at or close to fair market value to begin with. A longer hold period allows the investor more time to make meaningful improvements to the land and actually see them translate to the productivity, versatility and resiliency of the farm.
There are many global trends that are positively affecting U.S. agriculture and farmland investing. Think of these trends as a tailwind that helps push valuations higher. In a world where there's increasing volatility, farmland investing is attractive due to its stability.
Leasing Farmland To An Operator For Income
Meanwhile, non-operator farmland landlords also earn income from the operation of the farm by leasing the farmland they own to an operator. This converts the operating income from the farm, for the landowner, to a straight-forward rental income stream. The rental income stream can be paid in cash or in a share of the farm’s production value.
Understanding the broader economic trends surrounding the crops grown, even if you aren’t involved in production directly, is crucial as a farmland investor. The same goes for understanding your relationship with the farm operator.
As is common with commercial real estate, most farmland owners utilize net leases wherein the operator is responsible for expenses related to maintenance, taxes, and insurance. Additionally, some farmland leases utilize “variable rent” structures in which rent is a function of seasonal farm income, which is impacted by harvest yields and crop prices.
Given the connection of farmland rents to farm income, it is in neither party’s interest for the farm to struggle remaining profitable. In fact, cash returns to farmland – the ability of the land to consistently produce a high-value harvest – is one of the key drivers of appreciation in farmland value.
This is especially true in the long-term. Farmland that has had a trend of consistent high cash returns without compromising its inherent endowment of soil and water resources will appreciate more. This is similar to a well-cared for building. It will likely appreciate more than one that has received little to no maintenance.
Farmland Location Matters
Finally, location and quality, as ever, are keys to successful farmland investing. Still, you are weighing a different set of factors than with other real estate.
Both your crop quality and land quality have to be high. Further, the climate of the region in which your property is located has to be favorable – and expected to remain that way – for growing the crops your operator plans to harvest.
Things To Know Before About Farmland Before Investing
The most important differences to grasp within farmland investing are between the different types of farmland assets. Farmland can be broken down into three basic categories: Annual or “row” cropland, permanent cropland, and livestock pastures.
Specifically, understanding the differences between row and permanent cropland is critical, as they have distinct risk and return profiles that can be seen as complementary to one another. Let’s dive into these two categories.
Annual or “Row” Crops
Annual crops, as their name suggests, have a short life cycle and are cultivated, harvested and replanted yearly. Annual crops include corn, rice, wheat, and soybeans. This category of farmland is often referred to as “row” cropland because of the way these crops are planted: in densely seeded rows usually laid and maintained by a tractor.
For the operator and landowner alike, growing row crops is less risky in the event of a downturn in crop prices or an environmental shock like a drought or a flood. This is because they can choose to plant different crops in successive years or rotate crops among different fields.
For investors, row crop investments are also among the least risky, as these types of properties are typically structured as cash rent leases. Rent is collected and paid to the investor in March, well before planting or harvest.
In managing a farm business, planting different row crops can be a means of reacting to changes in the physical or economic environment of the farm and can protect the value of the land in the medium- to long-term.
Permanent crops, on the other hand, typically demonstrate higher potential returns – as well as higher risk – than row crops. Orchards and vineyards are two good examples of permanent cropland.
Permanent cropland is Land that is planted in crops with a multi-year life cycle that can last as long as several decades. After a few slow years at the start of production, there will be a steeper ramp-up in cash returns to farmland once the plants mature.
Usually, permanent crops are more lucrative than most row crops; almonds or citrus fruits, for example, usually fetch a higher price than row crops like wheat or corn.
That said, the operator does not have the flexibility of easily changing the crops planted on the land after each year. Permanent crops are therefore considered a riskier investment.
To demonstrate why permanent crops are considered riskier, here is an example. In the event of an extended drought, a peach grower would be exposed to much greater risk of depleting water resources than a row-crop grower who can switch to more drought-tolerant varieties comparatively quickly.
Farmland Capital Appreciation Potential
Regarding farmland capital appreciation, permanent crops usually harbor greater potential than row crops. Capital appreciation of permanent crops is helped by the deployment of new farming technology.
It is in any farmer’s interest to make production as efficient and cost-effective as possible. However, implementing new technology or changing production processes are both costly as well. The decision to incur these costs needs to be justified.
Permanent crop growers need to offset an initial investment in the crop’s maturation. Making technological improvements like precision irrigation that will impact their bottom-line in the long run through elevated yields and savings on resource use can help.
Technical innovations in row crop operations, on the other hand, often mimic the shorter-term flexibility of the cropping choices the farmer makes. High-yielding, drought- and disease-resistant varieties can be planted in any given year. However, if crops are rotated, the value of the technology used to breed those varieties does not become part of the farmland’s value itself.
Overall, if you want to build your own farmland portfolio, finding a balance between these two types of cropland is important. One carries a higher yield along with more risk, while the other carries less risk but typically lower returns.
How Does Farmland Fit Into My Overall Portfolio?
Diversifying your portfolio by adding investments in farmland has proven to both reduce volatility and even increase overall returns. Nuveen, a thought leader in alternative investing, has published numerous reports on the benefits of including farmland in an investment portfolio over the years.
Farmland Can Help Decrease Volatility
Studies reveal that adding farmland to a portfolio consisting of only stocks and bonds both increases the portfolio’s average annual returns and decreases its volatility based on average return data over the last 30 years.
One of the easiest metrics by which to see farmland’s benefit to any portfolio is the Sharpe Ratio. It compares the overall return of an asset to its volatility, measured as the standard deviation in the asset’s returns over time.
Impressively, Farmland’s Sharpe Ratio not only outperforms conventional assets like stocks and bonds, but also outpaces commercial real estate and timberland.
Farmland Can Be An Inflation Hedge
Further, like other real assets, farmland can be an effective inflation hedge and is also uncorrelated with conventional assets like stocks and bonds. This has made farmland an excellent source of recession-resistant returns, as well as an attractive asset for our current moment.
In a time of historic decline and volatility in stocks, plummeting GDP and record unemployment, farmland has still managed to show a lot of upside – as well as overwhelming abundance.
In fact, at roughly $2.5 trillion in the US (Source: USDA) alone, farmland as an asset class is roughly as vast as multifamily real estate.
What Are The Best Ways To Invest In Farmland?
Depending on how you invest, there are a range of active and passive options to earn returns from farmland investments.
The traditional option for the average retail investor to gain exposure to farmland assets has been to simply buy into farmland REITs or other exchange-traded funds. Gladstone Land Corporation (LAND) and Farmland Partners Inc. (FPI) are two examples.
These types of investments offer diversification options across farmland types, and demonstrate returns that track consistently with averages across the entire farmland asset class.
However, since REITs must derive at least 90 percent of their income through rental or lease income, the deal structure and yield options for REIT managers are more limited.
On the other hand, if you’re interested in a higher yielding and more curated option, where you can select specific properties and build a farmland portfolio of your own, there are online platforms like FarmTogether.
A new addition to the world of farmland investing, platforms like this save you the trouble of performing extensive due diligence on your own, and represent a compromise between the liquidity of buying shares of a REIT and the attention to detail required when directly owning the land.
Adding Farmland To Your Portfolio
For the best mix of returns, flexibility, and selection of different properties, investing through an online fractional ownership platform like ours is a good option for investors new to farmland assets who want to go deeper than buying shares of a REIT.
The FarmTogether Advantage
The vanguard of farmland investing platforms, FarmTogether offers nothing but the highest quality farmland investment opportunities. Their team employs an academic approach to investing, having developed a disciplined investment philosophy by investing for some of the largest and most innovative institutional funds in the world, such as Prudential and Ontario Teachers’ Pension Plan.
With an unwavering commitment to their disciplined and conservative investment philosophy, the FarmTogether team incorporates risk-management strategies at every stage of the investment process – from research to due diligence to follow-up – to ensure they only offer properties consistent with their investment criteria.
With a plethora of available properties ranging in size, location, crops, and a multitude of other criteria, their due diligence process narrows down the field of possibilities to those demonstrating appealing risk-adjusted returns.
As an investor, the FarmTogether team ensures a fully transparent and low risk experience. You have access to all due diligence documents, project financials, proposed deal structures, investment documents including operating agreement, private placement memorandum, and subscription agreement, as well as detailed information on the operating partner.
The FarmTogether team also confirms water rights and quality, environmental compliance, and title, along with testing soil and crop production.
Related: Bill Gates Is Buying Up All The Farmland He Can
Invest in Farmland In Minutes
The FarmTogether team also confirms water rights and quality, environmental compliance, and title, along with testing soil and crop production.
When you invest with FarmTogether, you’re buying shares of an LLC. You become a partial owner of a farm of your choice, thereafter becoming entitled to proportionate returns. FarmTogether provides regular updates on your investments, including refreshed key performance indicators on productivity, photos and videos.
In addition to visiting our site, you can also schedule a call with the FarmTogether Investment Team to learn more.
Ready to invest? Be the first to hear about FarmTogether’s next live offering by 1) signing-up on the FarmTogether platform and 2) emailing firstname.lastname@example.org to reserve your spot.
15 thoughts on “The Definitive Guide To Farmland Investing: A Trillion-Dollar Asset Class”
Any other platforms similar to Farm together that offer lower fees? Thanks for all the info you shared!
The only downside of FarmTogether is their fee structure. 1% of the total investment and 1% per year is a lot and adds up since on average each of their offerings take >5 years to mature. Maybe I’m overthinking it – any different perspective will be helpful.
Sam, you plan to invest and make this as part of your strategy?
Yes, I plan for farmland to be part of my alternative investing bucket. Before I invest, I always try to do as much research as possible.
great and I hope you will share your research as a post:)
My three sisters and I manage a ranch ( over 200 acres) that we inherited from our Sicilian father here in SE Texas. We produced Brangus cattle ( Cross between Angus and Brahmin cattle). My dad has a degree in Animal Science from Texas A&M. The ranch has minerals and we have been producing. We no longer breed but the mineral value has increased the taxes. We have a grass lease for other ranchers for their grazing purposes. The leasing covers the taxes and ALSO provides a discount on the taxes. It also helps with ranch maintenance. We also have other products: hay, pecans and mesquite wood ( floors, mostly). We have hunting at certain times. The hunting helps to keep the dangerous feral hog population controlled. My daughter will graduate UT this coming May and work for a large Law Firm in Houston with a significant oil and gas practice. She will be in the corporate section: Mergers and Acquisitions and Capital Markets. Her environment growing up has played a significant role in her career path. We hope the future of the ranch will be in good hands for the next generation.
Wow! How interesting, a sliver of life that us city slickers know nothing about. Thanks for sharing details :)
Great article and made me really think about new and different ways to invest. I could definitely see this as part of portfolio especially as a replacement to bonds paying .5%. I did have one question do they offer organic farms as a option? It would be a added bonus to invest in the type of food I eat!
My grandmother owned a 65 acre farm (land) that she leased for the cost of the annual taxes, even as a young boy I could not understand how this could be a good deal for my grandmother.
Today my friend Brad leases 200 acres for taxes only and farms soybeans. I pressed Brad at length about how is it possible to lease 200 acres and only pay taxes? He doesn’t really have an answer except to say “that is the way it has always been”. My understanding is the largest farmers in the county lease most of their land for taxes only. I live in the flushing MI. area, could
somebody please enlighten me as how investing in farmland could be a good investment when your returns are basically equal to your expenses.
The answer to your question is it is not a good investment in that scenario. No way to make money if you just cover taxes. There may be isolated situations where land owners have small tracts that cannot be efficiently operated so the owner will lease it to a farmer to cover taxes because the alternative is idle land the owner must maintain and pay taxes. This is, however, is not the norm and definitely not the way an investment grade tract would be leased to a sophisticated operator.
High-quality Midwest farmland leased for row crop production recently generated 2.5-4.0% cap rates. That’s lower than a lot of other real estate assets, but one has to keep in mind the land does not depreciate, usually the operator covers maintenance costs and vacancy rate is effectively 0%.
It’s a good idea to retire from farming relatively early, as the odds of having a serious injury go way up as the farmer gets older.
Somewhat sadly, a lot of farmers wind up with none of their kids willing to pick up the reins (so to speak), so they work at it longer than they really should. And it most certainly is hard work, for most of them.
My step-grandfather always owned several farms and stayed at it until he died. He once told me that the secret was to never, ever, raise livestock. That way, he said, once the last harvest was in, he could go spend the winter in Aruba. And he did. He lived to 102. Fortunately, his driver’s license wasn’t set to expire until he was 103.
A few thoughts from a Midwest Farmer’s Daughter . . .
Unless you inherit land and equipment, it’s usually not possible to retire early from farming. Farmers have to spend years farming to pay off the land so they can rent it out to have a retirement income. A farmer’s version of a 401K is paid off farmland that commands good rental income.
Sadly, a lot of farmers wind up with none of their kids farming, because the farmer has difficulty giving up the reins. By the time they are willing to let go their kids have moved on with their lives and chosen different career paths. Some people say that farming is in your blood. A lot of farmers just can’t turn it over to the next generation.
If you want to make a good living at farming, especially farming to support multiple families, it is big business, not the idealized “family farm.” Agricultural commodities in the corn belt have slim to negative profit margins. There are easier and less stressful ways to make a comparable or better income than farming, like selling farmers the equipment and inputs needed to raise their crops or working for the bank that finances the operation.
I’m grateful for everything I learned growing up and working on a farm, and I still contribute my time when needed; but I’m also grateful that I don’t rely on farming as my main source of income. I guess it’s just not in my blood.
Yup. I heard a lot about it when I was dating a Midwest farmer’s daughter back when I was living in Iowa. Des Moines is a big insurance company town and we were both in IT, as were her sister and her brothers. Her dad was in the process of selling his dairy farm so he could retire.
Ironically, given what you said, my next contract job after we met was at John Deere Credit, where I helped build a web application so John Deere dealers could help their customers get farm loans (so they could finance seed and fertilizer, not just equipment).
So far as the big farm thing goes, one of my roommates in college was a two-year ag student. He was just there to get the degree because it would help with getting various kinds of farm assistance and such. He was heading back to his family’s place in the thumb of Michigan where they grew navy beans. He had nothing but contempt (maybe a little too much, but he was young) for small farmers who stayed small and did not treat it like a business. His father had purchased 4 adjacent farms to add on to his own so that it would make financial sense to own their farm equipment. He was going to get married and live in the smaller, old farm house, then swap with his dad when he retired. Had his whole life planned out to every detail. Their biggest problem, as I recall was that the four farm houses they had picked up with the farms they purchased were too nice to tear down, but too far from town to be easily rented.
Wow surprising that 40% of farm owners are over 65. That’s a lot. I don’t doubt that many of their kids are likely to sell when they inherit the farms because it seems like so much work to manage. But in any case we really need good farms! So many great insights in this post. A lot I didn’t know about before. Makes me want to go out and support more farmers markets now!
Overwhelming information. But sure looks promising. Always something new and interesting in the land of Financialsamurai.