My grandfather used to own a small, 8-acre fruit and plant farm on the western side of Oahu. It was a magical place nestled next to the majestic Waianae mountain range. The farm was part of his retirement income strategy as he rented out a portion of the land to his neighbors who grew green onions.
When I was going through my quarter-life crisis in 2001, I thought about quitting finance altogether and moving to my grandfather’s farm to help him maintain the crops. I longed for a simple life where I’d clear the brush and water the trees in the early morning, eat mangos and papayas for brunch, take a midday nap, box up the fruit to sell at the local grocery store, and then go surfing in the early evening before coming home.
Unfortunately, I never made the move. And as my grandfather grew older, the weeds started to overtake much of the plantation and we eventually sold the property. In retrospect, I wish I had at least taken a sabbatical to live on the farm and help out my grandfather.
Given my connection with farming, I was intrigued when Artem Milinchuk, founder of FarmTogether, asked if he could sponsor me to do some research about the benefits of farmland investing. Here’s a post about what I learned about the asset class.
How FarmTogether Works
FarmTogether is an online platform that connects you to available farmland investment opportunities in America. The main company, FarmTogether Management LLC, a 100% owned FarmTogether Inc. company, purchases farmland with the help of investors. After inspecting potential investment areas, land may be purchased if it passes rigorous inspection.
Investors in the land are paid out from two different types of returns.
One way is through income from the land. These are typically cash lease payments or revenue/profit share paid by the farmers who are using the land.
The second way investors may profit is through the appreciation and eventual sale of the land. FarmTogether focuses on purchasing land below market value, improving the land, and reselling it for profit in 5-7 years.
The FarmTogether Team
The FarmTogether team is a group of individuals who have worked in various sectors of finance and agriculture.
Across the different board members, they have extensive experience in investing, agriculture, and real estate, not only in the United States but globally. Having people who actually have knowledge of the agricultural industry is extremely important.
To learn more about their team you can check out their about page.
FarmTogether works with investment managers, farmland brokers, appraisers, water and agriculture experts, and advisors before they purchase any land.
Investing in farmland is an interesting and potentially long-term profitable asset class due to the following reasons:
- The decreasing availability of farmland – 31 million acres were lost in 2018 due to development
- An increasing population (global population is expected to go up by 27% by 2050)
- Increased food demand – better quality of life, rising income, and dietary trends point to a rise of 58% to 98% in food demand
- Farmland has historically provided high returns and decreased volatility.
Until recently, investing in farmland required you to know about the agriculture business as well as a good deal about the quality of the soil. If you went out and bought a useless plot of land, you would end up unable to rent out the land or find a farmer willing to pay you rent.
In the increasing age of the internet and cyber connectivity, investing in farmland is becoming easier. You should already know about REITs, but farmland is starting to take on a similar approach.
FarmTogether is making it easier for regular investors to get a stake of profitable farmland without having to know everything about the agriculture industry. Purchasing farmland may become an increasingly popular way to diversify your investment portfolio.
Historical Farmland Investment Returns
Over the last 47 years, farmland in the United States has yielded returns of over 10%. However, between 1992 – 2016, the returns have been even more significant -yielding 12% according to a white paper done by TIAA-CREF/Nuveen, LLC.
In contrast, real estate (NCREIF) has provided a return of 8.7% and the Russel 3000 a return of 8.8%. Not bad, but not as high.
Farmland And Stability Versus Volatility
Similar to real estate, farmland has shown to be much more stable than stocks. The ability to diversify a portfolio via investments in assets that have low to negative correlation is one way to protect your investments.
According to Morningstar, the standard deviation of the S&P 500 Total Return index is about 13.5% over the last 15 years. The standard deviation of the 7-10 year US Corporate Bond Total Return Index over the last 15 years, was 7.6%. The same calculation for NASS cropland total returns is only 6.7%.
Further, let’s take a look at the 10-year correlations for annual returns across asset classes. As you can see from the chart below, farmland investing is not correlated with the S&P 500 and negatively correlated with Bonds, Emerging Markets, Gold, and Cash. Farmland is most closely correlated with real estate at 0.549, which makes sense.
How Much Farmland Is Available?
The potential for profits from the farming industry is large. If you look at the United States, farmland is a $2.5 trillion dollar market. This is significant, especially if you look at the global real estate market that averages around $8.5 trillion under professional management.
In addition, if you look at the aging farmer population (average age of 60 years old), large amounts of farmland are set to change hands in the near future; either heirs or investors.
Farmland Industry Markets
Chances are, you don’t know too many people currently investing in farmland. This may be an indication that investing in farmland is still in its infant phases. However, there are still successful investors pouring money into this relatively new investment vehicle.
Value Advisors did a study of global investment funds from 2005 to 2017 and found that funds specializing in assets in the food and agriculture business increased from 38 to 446. The total amount of assets exceeded $73 billion. In other words, more capital is chasing farmland investing.
Even institutional investors such as Ontario Teachers’ Pension Plan and investors such as Michael Burry (famous from “The Big Short”) have poured significant amounts of capital into farmland.
Portfolio Diversification and Farmland
The shrinking size of available farmland and the increasing need for more food may be a good hedge against inflation. Farmland, after all, is a real asset that will always have intrinsic value.
Possible Risks Of Investing In Farmland
Like all investments, farmland does have inherent risks. Most common risks are overpaying for land and not understanding the prevailing lease rates and their drivers in the area – both can lead to sub-par returns. FarmTogether mitigates these risks by being conservative in their underwriting and partnering with highly experienced farmers and farmland investment managers.
One common misconception is that farmland is volatile due to the volatile nature of the crops. Long-term prices on agricultural commodities do influence farmland returns. However, at FarmTogether, the investments mostly lease out the land, not operate it. Therefore, they do not bear the operating risks or the short-term risks of crop pricing.
This may sound a little too good to be true, but the historical volatility and returns of farmland investing show why it is an attractive asset class. It makes sense when comparing farmland to real estate. If you own a building in which Starbucks leases a space from you, your rent doesn’t fluctuate with the price of coffee beans.
Of course, long-term crop prices still will influence the farmland return. So how do you choose which crops to invest in? As with any investment platform, you need to trust the team’s due diligence and underwriting in what deals they bring to the market.
While I imagine that most of us are not experts on, say, the almond markets, FarmTogether does provide fairly comprehensive, yet easily digestible overviews of the crop markets they target, outlining supply/demand and price forecasts.
FarmTogether is constantly adding new educational materials and conduct regular webinars where anyone can ask the team any question on their mind.
Finally, as with any investment, it is recommended to diversify with multiple properties across different crops, regions and geographies. With a minimum investment currently at $10,000, you don’t need to spend too much to achieve broad diversification.
Internal Diversification Between Crop Types
With FarmTogether, you are not just investing in farmland in general, but you invest in land geared towards certain types of crops. Some farmland may be perfect for one crop, but those crops may be highly dependent on the weather. If the weather is unusual for a few years, it may be difficult to find farmers willing to lease the land.
This is where farmland diversification comes into play. You may invest in certain parcels geared towards orchards, leafy plants, or any other combination in between. FarmTogether’s team/board is also invested in their product so it’s in their best interest to only purchase/publish the most stable and reliable land investment offerings.
If you’re curious, row crops (e.g. corn) typically will have less volatility in returns than permanent crops (e.g. almonds).
As an investor, you are given the choice on what plot of land to invest in, rather than pooling your money with other investors without any choice of the specific investments. You are very much in control of your investments and if you don’t want to invest in land designated for cotton, you don’t have to. You direct the type of land your money buys.
Partnerships With Farmers
In addition to having industry experts as part of their board of directors, FarmTogether has created partnerships with farmers they actively work with and lease the land to. By collaborating closely with farmers, FarmTogether ensures they have available farmers who are willing to lease the land after their initial purchase.
Additionally, FarmTogether has leasing benefits for farmers. Investors lend substantial capital to farmers looking to expand their operations in a flexible and capital-light manner.
By being transparent and working with farmers on the front end, FarmTogether is able to set future purchases up for immediate revenue and land management. This is quite different than many other companies who purchase properties first and then focus on trying to find renters.
Evolution Of Farmland Investing
Farmland hasn’t always been the easiest asset class to add to your portfolio. Buying a farm isn’t a feasible strategy for an average investor. Traditionally, the asset class costs several million to enter, with low liquidity. Even if you could afford it, the specialized knowledge and efforts needed to source and manage the land would deter most investors.
As a result, many investors overlooked this asset class with a history of strong returns. Previously, investing in farmland was only available to extremely net worth investors who were able to invest millions of dollars.
FarmTogether has helped broaden access to farmland investing and lowered the minimums.
Minimum Requirements To Invest With FarmTogether
FarmTogether currently allows minimum investments of $10,000 to $50,000 per transaction. In addition, investors must be accredited. This typically means having a yearly income of $200,000 as an individual or $300,000 if married or having a net worth of at least $1 million, excluding your primary residence.
Fees, Tax, & Regulatory Information
FarmTogether uses a fee structure that is unique to each property. They do not have a set fee schedule due to the difference in properties. For each plot of land available to purchase, the fee structure is clearly displayed before you invest any amount.
Right now most of their deals have a one time 1% expense reimbursement fee and an annual 1% management fee.
The average returns from FarmTogether properties range from 8%-15% net of fees.
As far as taxes, each accredited investor income from the land is taxed on a Schedule E, IRS Form 1040. Capital gain tax is added when an individual plot is sold for a profit. FarmTogether provides all investors with electronic K1s
FarmTogether is an Exempt Reporting Advisor under the SEC regulations. Their CRD # is 304511 and their SEC # is 802-117227.
Farmland Investing For The Future
Farmland is both one of the oldest and one of the newest asset classes. With the supply of farmland shrinking and the demand for food growing, investing in farmland for income or resale makes logical sense.
I hope you have enjoyed my research on farmland investing today. Check out FarmTogether and see what they have to offer.
If you have any questions about how FarmTogether works or any questions on farmland investing in general, feel free to ask in the comments. I’ve asked the folks at FarmTogether to get back to us with questions on this new investment opportunity. Also, if you have any direct experience with farmland investing, please share your thoughts.