Food costs a lot more today than it did a year ago due to rising inflation. But what’s really going on in the US agriculture industry?
Let’s take a look at what global trends are impacting the market with some insights by FarmTogether, a leading farmland investing platform and Financial Samurai sponsor.
Historical Farmland Investment Performance
Farmland returns have performed well as an investment over the last several decades. Returns are generated through income (via crop sales) and capital appreciation through the underlying land value.
Between 1992 and 2021, annual farmland returns averaged just under 10.75%. That’s higher than the average returns from stocks, bonds, and even real estate, in the same time frame.
Farmland’s strong performance stems from the rising land valuations we’ve seen over the last decade. From 2020 to 2021, average cropland values per acre across the United States increased by an average of almost 8% to $4,420. That’s the highest growth rate since 2013.
Some regions, such as California, averaged nearly $11,000. Farmland has also historically produced consistent operating returns. The USDA estimates the average cash rent for irrigated cropland across the United States in 2021 to be $217 per acre, up 1.4% from 2020.
Increase In Institutional Demand For Farmland
Institutional investors are taking notice. Over the last 30 years, institutions have significantly increased their investments in farmland. In 2005, there were fewer than 20 farmland funds operating around the world. In early 2020, the number of farmland funds reached 166, with an aggregated AUM of $38 Billion.
Farmland’s historically stable and uncorrelated returns make it a solid option for many investors. But what’s propelling farmland’s growth, and how might these trends create long-term value for your portfolio?
Let’s break it down.
What Is Propelling Farmland’s Growth?
Here are seven main reasons why interest in farmland is growing.
1) Growing global population
The global population is swiftly growing towards an all-time peak. The U.N. predicts the population will reach 9.8 billion by 2050 and just under 11 billion by 2100.
With nearly ⅓ more mouths to feed, there will be drastic increases in the demand for food.
Meanwhile, the global middle class may reach 5.3 billion people by 2030. That’s up from 4 billion in 2021. This rise in income levels, particularly in China and India, will likely increase the demand for healthier, higher-value foods like fruits and nuts.
The rapid population growth, coupled with a demand for richer diets, will require farmers to roughly double the number of crops currently grown by 2050. This presents both a challenge and an opportunity for farmers and farmland investors.
Nearly all of the population growth will occur in developing countries. Thus, U.S. exports will be crucial to keep pace with this demand. In 2021, the United States posted a record-breaking year for agricultural exports. Not only did exports increase by 18% from 2020 to 2021, but last year’s exports also exceeded the previous record, set in 2014, by 14.6%.
2) The total global supply of farmland is shrinking.
At the same time the population grows, the supply of farmland, along with our natural resources, is decreasing. In 2021 alone, the U.S. agriculture industry lost 1.3 million acres of arable farmland. More surprising, this number isn’t out of the ordinary.
Farmland acreage has decreased by an average loss of over 1.9 million acres per year since 2014. That’s an alarming total of 13.62 million acres. Of this, roughly 4.4 million acres were considered “nationally significant” – land with productivity, versatility, and resilience (“PVR”) values that create optimal growing conditions.
Much of this loss results from deforestation and new development to meet the demands of the growing population. However, other factors, such as pollution, erosion, and natural weather events, have also played a significant role.
With a shrinking supply of U.S. farmland and rapidly growing demand, the laws of supply and demand favor the long-term value of farmland. Agriculture farms with healthy soils, a redundant and resilient water supply, and efficient infrastructure will be worth more as high-quality farmland is increasingly scarce.
3) Consumers are shifting toward more health-conscious lifestyles.
The COVID-19 pandemic accelerated many trends related to health. Today, consumers are more interested in foods that can improve mental health or promote gut health and immunity, for example. They’re also more interested in plant-based diets, as consumers increasingly look to eat more sustainably.
More than 47% of people report eating more fresh produce today than before COVID-19. Meanwhile, nearly half of all Americans sought ways to cook healthier at home during the pandemic.
As more people prioritize healthier foods and snacks, high-value crops like apples, almonds, and oranges are experiencing significant growth. With no signs that this health trend will slow, the farms that produce these higher-value crops – most notably farmers in California – should experience positive growth.
4) Growth in agtech continues to escalate.
Agriculture technology is forecasted to grow strongly over the next 5-10 years. Recent estimates expect the industry to surpass $22.5 billion by 2025. That’s rising almost 40% yearly. Just take a look at the snapshot of stats below:
- Artificial intelligence is expected to grow from $671.6 million in 2019 to $11.2 billion by 2030.
- Farm robotics is expected to grow from $4.9 billion in 2021 to $11.9 billion by 2026..
- Precision farming is expected to grow from $789 million in 2020 to $1.5 billion by 2028.
- Vertical farming is expected to grow from $3.2 billion in 2020 to $24 billion by 2030.
The agriculture industry has also been a rapid ramp-up in adopting various water-saving technologies. Examples include drip irrigation which delivers more precise doses of water directly to the crop’s root zone.
This rising trend is quite apparent in California where farmers are among the most willing in the country to adopt new water-saving measures. The state produces nearly twice as much food as it did four decades ago, yet uses only 10% more water to do so.
These tremendous technological gains in agriculture technology, coupled with a host of other tools like genetics, have allowed farmers to grow more with less. In turn, modern farmers can better preserve natural resources, improve overall efficiency, and increase yields to meet the forecasted food demands – and spending less.
5) There’s an intensifying interest in ESG investments.
Environmental, social, and governance (ESG) investing is also known as impact investing, socially responsible investing, and sustainable investing. It involves investing in companies highly rated on societal responsibility and environmental scales by research groups, third-parties, and independent companies.
The impact investment industry has increased 10x over the past ten years. Today, the majority of investors assess exposure to ESG risk when screening potential investments.
From 2020 to 2021 alone, the number of ESG funds increased by 36%. And, these funds continue to set a new record of cash inflow every year (with 2021 being no exception).
Farmland investments can offer a unique value proposition for investors looking to drive impact beyond returns. Direct farmland investments can protect agriculture land from development.
In addition, it can help fund the upgrades and transitions necessary for farmers to incorporate agtech and more resilient approaches to their operations. Efficient operations with properly managed resources should reinforce the land’s value over time, meaning better returns for investors in the long run.
6) A desire to invest in more defensive assets during times of uncertainty.
With continued uncertainty surrounding our economy, more investors are flocking to safe-haven assets like agricultural land.
Historically, farmland values have tracked inflation very closely. Farmland has a 70% correlation with the Consumer Price Index. Even more impressive, since 1988, annual farmland returns have been higher than the prevailing inflation rate each year. This is because when food prices increase, farmers get higher commodity prices, and land becomes more valuable.
Even as the Fed attempts to quell inflation (the Fed raised rates by 0.75% in June – the most significant single rate hike in 28 years), farmland is still likely to hold its value as an investment.
While markets continue to respond adversely, farmland has a historically strong record of maintaining value during market crashes and consistently generating positive returns even when stocks, bonds, real estate, or gold might produce negative returns.
7) Better accessibility as the composition of farm-owners evolves.
With the average age of farmers nearing 60, the USDA estimates that 70% of family farms will change hands over the next 20 years. However, just 9% of farmers in the United States are under 35. This means fewer young farmers are coming in to take over operations.
Yet, despite this proliferation of farmland properties entering the market for the first time, it is still increasingly difficult to purchase entire farms outright. Several barriers, including skyrocketing farmland values, stand in the way.
How To Invest In Trends Impacting U.S. Agriculture
These trends have created the perfect market for investment managers, like FarmTogether, that leverage technology to bolster a new wave of farmland owners – at a fraction of the cost.
Founded in 2017, FarmTogether offers unparalleled farmland access across three main products: Crowdfunded Offerings, Sole Ownership Bespoke Offerings, and most recently, their Sustainable Farmland Fund LP.
FarmTogether specializes in row and permanent crops, with over 40 active properties across the U.S., offering investors a wider variety of options to suit their unique needs.
Interested in learning more? Visit FarmTogether.com and see if farmland is a good fit for your portfolio.
Dave S. says
Does FarmTogether offer farm portfolios (like indexes) that I can investing in, instead of just individual farms?
I’d rather invest in funds if they have them.
Financial Samurai says
I believe they are launching a fund and will write a guest post about it next. I like funds too for simplicity and diversification.
Ny Money Hawk says
My mother owns farmland in MN that she rents out so always interested in the topic. Cool read.
Bill Gates apparently has been gobbling up farmland lately (just saw an article on this and North Dakota did not welcome his purchase) so there must be something to it.
Makes sense I guess as farmland is valuable and the amount of high quality farmland is limited and decreases rather than increases over time (due to development of land for other uses and climate change / weather issues).
Financial Samurai says
Yes, Bill Gates has been aggressively gobbling up US farmland and is the largest farmland owner now.
Farmland is good enough for Bill, it should be good enough for the rest of us!
Always appreciate your insight.
We just bought 2 acres farmland in Waialua, HI.
I will have another opportunity to buy additional acreage very soon but will be a tough sale/convincing my siblings to buy so I am sharing your article with them. Let me know when you’re in Honolulu I am happy to share with you and your family tropical fruits (whatever fruits available) from the farm.
Financial Samurai says
Amazing! I’m so jealous you are living in Hawaii and enjoying the fruits of the land! It was my childhood dream once as my grandparents owned a 7-acre fruit farm in Waianae.
This article was published yesterday in the Philadelphia Inquirer about the trouble that US farms (at least the ones in NJ) are in.
Dave S. says
” “If this continues, the American farm will be no more,” Infante-Casella wrote. “Then Americans will become even more dependent on foreign food. We now import nearly 50 percent of fresh fruits and vegetables.” ”
That’s why I’d prefer to invest in an index (World farmland index?) instead.
Almond Butter says
What are some ways to get in for non-accredited investors?
Financial Samurai says
You can invest in a number of agriculture ETFs without needing to be an accredited investor:
Almond Butter says
Thank you so much. I bought NOBL on your suggestion. BTW, your podcast was great. Mic issue wasn’t a big deal. I was there for the content. Your finance background is so much value add, and unique. Great work!!
I’m really interested in agtech but don’t know much about it yet. That’s fascinating that California was able to increase output while finding ways to better control and utilize water using technology. Thanks for the updates