Once upon a time, farmland was largely owned by farmers.
These days, however, farmland is changing hands—and fast. While family-owned farms continue to account for more than 95 percent of farmland in the U.S., it appears as though the next generation isn’t interested in tilling the soil of their predecessors and owning farmland.
Today, nearly 35 percent of all farmland owners are aged 65 and over, while only 8 percent of farmland owners are under the age of 35.
“In the next five years, around four million acres of farmland a year will exchange hands in the U.S., partly driven by the generational transfer of assets,” Martin Davies, CEO of Westchester, the global agriculture arm of Nuveen, told IPE RA magazine. “People that have inherited land don’t want to farm it.”
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And so, a highly rewarding asset (one that beats most other asset classes) that was once out-of-reach for your average investor is becoming more accessible.
As more farmers sell their land and new, innovative ways to invest in agriculture emerge, investors have a historic opportunity to add farmland to their portfolios.
This is especially true as there is less land available to farm while the world population continues to grow, which makes investing in farmland a decision with the potential for solid returns.
Active Farmland Ownership: A Brief Overview
Before we dive into passive farmland ownership, let’s take a quick look at what active farmland ownership as an asset class entails.
When we talk about active farmland ownership, we’re typically referring to farmland you purchase to manage yourself.
Not only do the high capital requirements make purchasing a farm cost-prohibitive for many individuals (especially with farmland values rising almost everywhere), but there’s also the tough, hands-on work, knowledge, and experience that comes with running a successful farm.
Here are a few considerations every investor should make before deciding to take a leap into active farmland ownership:
- Soil profile – Not all soil is suitable for growing crops. Problems with your farmland’s soil can be costly to solve, if they can be solved at all. Before purchasing a farm, it’s important to research the history of the soil to determine whether it will sustain your business plan.
- Environment – Just as not all soil is suitable for growing crops (both row crops and permanent crops), not all environments are suitable for agriculture. You’ll need to investigate environmental factors like rainfall, freezes, and natural disasters.
- Water sources – Farming demands plentiful water supply for the land to have good crop yields and subsequent high food production. In addition to looking into available water sources, you’ll need to familiarize yourself with local water ordinances and restrictions.
- Supply chain risk – In addition to environmental risks to the crops, farmers are impacted with threats like economic instability, transportation interruptions, and supplier inconsistency. These adverse market conditions can lead supply chain risks, making your farm business vulnerable to profit losses and disruption.
- Hard work – Last, but certainly not least, farming is hard work. Even if you hire hands to handle sowing crops, plowing fields, mending fences, baling hay, etc. — there are still tasks like hiring laborers, negotiating prices and contracts, establishing a customer base, and keeping an eye on the market.
Active farmland ownership to grow crops can be a rewarding investment opportunity as farmland values go up, especially with an increasing global population, but it’s by no means an easy one, nor one for those without the capital, experience, time, and patience.
Passive Farmland Investing: An overview
Today however, agricultural investing isn’t restricted to active farmland ownership. There is a growing number of options for passive farmland investing that don’t require any knowledge, experience, or even actual farming.
Investors are catching on—and reaping considerable rewards. Bill Gates, the largest private owner of farmland in the United States, is not a farmer, nor has he ever been. Warren Buffet, billionaire and successful investor, has owned a profitable farm for more than three decades despite admitting that he knows nothing about farming.
These two see farmland investing as providing something a mutual fund and other asset classes cannot: passive income and increasing land values that can also act as an exceptionally strong diversification tool with low volatility.
In a letter to his shareholders, Buffet called the farm one of the best investments he ever made. “Now, 28 years later, the farm has tripled its earnings and is worth five times or more what I paid. I still know nothing about farming and recently made just my second visit to the farm,” he wrote.
5 Options for Passive Farmland Ownership
Investors who want to follow in the footsteps of these financial giants have several options for investing in land and adding it to your investment portfolio. Here are five ways more investors are using to invest in farmland without actually buying a farm, knowing anything about farming, or even setting foot on a farm (if you don’t want to):
1. Agricultural Stocks
One traditional option for passive farmland investing is to purchase shares in publicly traded companies in the agriculture industry. Agricultural companies can be involved in any aspect of the supply chain, from manufacturing farming machinery and irrigation equipment to transporting produce to supermarkets.
Agricultural stocks can also be purchased in companies that produce specific products like fruits and vegetables, grain, tobacco, fishing, and livestock.
2. Agriculture ETFs
There are also agriculture exchange-traded funds (ETFs), which allow you to purchase a professionally managed collection or “basket” of stocks in companies in different sub-sectors of the farming and agricultural industry.
An exchange traded fund can be a handy way to gain diversified exposure to the agricultural industry without extensive experience in the sector.
3. Agricultural Mutual Funds
Like ETFs, agricultural mutual funds represent a basket of individual stock of agriculture-related companies overseen by professional portfolio managers.
Key differences include a higher minimum investment for mutual funds, which tend to be more actively managed and traded at the end of each trading day, and you might be investing just in agricultural commodities and not the agricultural land itself.
4. Farm REITs
Real estate investment trusts (REITs) are companies that invest in income-producing real estate. REITs can be found for virtually every kind of real estate sector—including farming. Farmland REITs typically buy multiple farms in different geographic areas to lease to farmers.
Compared to actually purchasing farmland, farmland REITs offer greater diversification and liquidity since REITs can be easily traded on stock exchanges. They’re also more affordable, as the minimum investment is a single share.
But there are significant drawbacks with these four methods of passive farmland ownership. Because stocks, ETFs, mutual funds, and REITs are all publicly traded, they are subject to the same risks as your existing portfolio of stocks—namely, high volatility and sentiment-driven swings.
This means that when the stock market crashes, it will likely take your publicly traded agricultural stocks, ETFs, mutual funds, and REITs down with it.
In addition, with all the aforementioned approaches, you don’t have control over your own assets, and important decisions regarding your finances are left in the hands of others.
This brings us to our fifth and final option for farmland ownership: investing in farmland via an online platform.
5. Online Platforms
There are a growing number of online platforms that provide individuals with direct access to farmland investment opportunities. Typically they work by allowing investors to purchase shares of various vetted farmland properties, and collect rental income and a share of harvest profits every year.
However, as with the previous investment options, there are several risks to keep in mind when deciding whether to invest through a certain platform.
One glaring problem is market saturation, as more and more companies flood the market, the supply of prime farmable land in domestic markets is limited. In addition, because many of these companies are still very young, they have a limited track record of successful investments. For some, you also have to be an accredited investor.
LOTs: An Innovative Approach to Farmland Ownership
A solution to the problems associated with traditional farmland investing are Farmfolio’s innovative Land Ownership Titles (LOTs), subdivided pieces of a larger farm available for direct purchase by both accredited and non-accredited individuals.
They offer owners the chance to buy farmland as part of a pre-developed, vertically integrated, turnkey system managed by a Farm Owners Association (FOA) which hires a third-party management team to handle everything involving farmland production, including planting, land maintenance, harvesting, and sales.
These farmland partners have extensive experience in the farming sector and handle not only crop production but also help your land generate higher yields. As a LOT owner you will continue to receive the harvest revenue until you decide to sell your legal title to another investor or pass it down to a beneficiary.
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At Farmfolio, you can invest directly in LOTs in high-performing farms in emerging markets, which allow you to purchase real land, producing real fruit that is in high demand and is sold around the world from successful Latin American farms.
Farmfolio LOTs have produced consistent results and stable growth with historical returns that rival other asset classes. Visit our opportunities page to learn more about farm investments, how to invest in farmland, and to see our currently available LOTs.
Or you can fill out the form below to find out how you can add farmland to your portfolio and generate farming income from agricultural products with less volatility than other assets.