Boost cash flow, reduce risk, and maximize gains with farmland.
Life is only getting more expensive. For some, the current highest inflation in 40 years might mean pushing out their retirement plan a few more years, especially as the stock market is seeing plenty of ups and downs. But if you’re a diligent saver, an increase in the cost of living should be a wake-up call to review your retirement portfolio and individual retirement accounts to see where you can spur some extra growth. One area that should be on your radar is farmland.
Why farmland? For starters, farmland as an asset class has long proven to have no correlation to the volatility of economic cycles. It has also posted historically high returns, with farmland values having increased 300 percent since 2000. It’s also considered relatively low-risk, which matters more the closer you get to retirement.
These are six ways farmland investment opportunities in a self-directed IRA account can bolster your retirement and fund your future.
1. Capitalize on Unmet Market Demand
The world population is growing, forcing us to seek alternatives for things like fuel, building materials, housing, and transportation. But the one constant in an ever-evolving world is the need for food. Farmland will always be in high demand, some would say even more so than residential real estate, because it’s required for our very existence.
Looking through a lens of ROI, using land ownership like farmland to boost your retirement account hinges on not just the land, but also the types of products grown on the land. Landowners earn an ROI on the land itself as well as the farmed products once they’re sold, and it’s fair to say that some products are more valuable than others.
Take limes, for instance. They are in short supply because of the low quantities available and the small number of farms growing them. They’re also in high demand, which further contributes to their scarcity. All of these factors create the perfect conditions for premium pricing.
Coconuts are another example. They are the basis of many byproducts, including coconut oil, milk, and water. The fruit’s versatility ultimately leads to higher market prices and helps maintain demand in the market.
Both limes and coconuts are underrepresented in the global farm ecosystem. This makes it even more attractive for those looking to add farmland growing these types of crops to their retirement accounts, as low supply and high demand combine to create the potential for attractive annual harvest income and long-term land appreciation.
2. Gain Value From Shrinking Inventory
Farmland is becoming scarcer. The map below shows the amount of U.S. farmland converted to urban and residential development in a span of just 20 years.
From a retirement account perspective, this is a supply and demand opportunity at work. With less farmland, the value of the remaining land inherently increases, and this story is true not just in the U.S. but also abroad.
According to FAO, about 38 percent of the world’s land is considered farmland. Of that, only about a third is used for growing products, while the other two-thirds are utilized for grazing livestock. With declining land for farming and growing demand for food, the natural scarcity of farmland means any land in your retirement account will likely increase in value over time.
3. Beat the S&P
Farmland or stocks: Which gives you the best value? The answer might surprise you.
Historically, farmland has offered higher average annual returns than traditional investments like the S&P 500, the NYSE Composite, bonds, and even gold. One of the key reasons is that farmland values are not correlated to traditional market assets like equities and residential or commercial real estate. Each of these is prone to volatility, which in turn can lead to unpredictable returns. By comparison, farmland has consistently delivered double-digit returns over the last 40+ years. This high rate of return is even more impressive, given the low volatility and low risk associated with farmland compared to other asset classes.
4. Diversify Your Portfolio
Diversifying your portfolio and retirement funds is one of the wisest financial choices. It’s also one that many make early on, as it can help offset financial losses when one asset takes a hit.
But there are right and wrong ways to diversify. Many times, people think they are diversifying their self-directed IRA but in fact they are buying overlapping assets or mutual funds. At the same time, they are often leaving out assets like farmland because they aren’t available as quickly and easily as traditional markets like shares of stock.
What makes farmland unique is that it offers many ways to diversify your portfolio. By using an individual retirement account, you could add a stable investment like farmland to an existing lineup of stocks, bonds, and real estate. Likewise, you could become the owner of different types of farms, such as lime and coconut that offer strong investment returns.
Further, you can benefit from not just the income sources from the crop itself, but also the increase in the land value that has historically appreciated in value. If you hold this land in a retirement account, farmland investors will also avoid paying any capital gains taxes on the appreciation of the land and income taxes on the harvest income until the money is withdrawn.
Taken together, farmland is one of the most powerful diversification tools available.
5. Enjoy Low Volatility
Farmland adds such a great balance to a portfolio thanks to its not being correlated with traditional markets. When the pendulum of stocks, bonds, and real estate swings, farmland assets remain relatively unaffected. In fact, the volatility of farmland is more akin to that of a U.S. Treasury bond, the safest asset class that investors can buy. Between 2000 and 2018 for example, U.S. farmland delivered negative quarterly returns only once and continued to grow as the S&P 500 declined.
When you’re saving for retirement, there’s no greater feeling than having made investment decisions that offer stability. It’s fair to say that not all assets appreciate the same way, so having one that is somewhat predictable in terms of annual gains can help you continue growing your wealth and mitigate any setbacks caused by other volatile assets.
6. Outperform Inflation
Farmland has historically provided a hedge against inflation. As the prices of goods and services increase, the buying power of a dollar declines. While many economists think of inflation as a good thing — and it can be since it signals a healthy economy — it also means that your cash assets don’t go as far as your purchasing power has gone down. To maintain or grow your wealth, you need to invest in non-cash assets that will grow in value over time at a rate that exceeds inflation.
While other assets may decline in value during periods of inflation, farms can produce a positive cash flow from crops sold while the land also increases in value. As we shared in a previous article, farmland is a powerful hedge against inflation, with annual land value increases almost tripling the rate of inflation itself. Given the current climate of inflation and uncertain stock market outlook, 2022 is a potentially ideal time to consider adding alternative assets to your self-directed IRA with lower risk like farmland to your retirement strategy.
Bolster Your Retirement Account With Farmland
If investing in farmland is so lucrative, why isn’t everyone doing it? The easy answer: Farmland isn’t easy to access. Census data shows that most U.S. farmland owners are operators, and about 86 percent of farmland is owned by families, while the rest is held by other parties. While there are other ways to add farmland to your portfolio, there are significant cons involved with any form of indirect ownership.
But now there is a way to buy land and own farmland in your retirement account without ever stepping foot on a farm. Imagine directly owning highly-productive land that generates annual harvest income and long-term land appreciation without having to do any of the work as a trusted third-party team handles farm operations and farm management. Watch this short video to get a quick look at just how powerful self-directed retirement accounts like a self-directed IRA can be:
The full How To Buy Farmland With Your Retirement Account webinar has been one of our most-requested videos. To watch it and learn more about the history of U.S. retirement accounts, the tax advantages and benefits of self-directing for U.S. taxpayers, an overview of IRS rules and restrictions, and a look at the different options available and recommended strategies based on your personal profile, click here.
At Farmfolio, our data-driven approach for identifying, developing, and using an expert onsite team to manage some of the best agricultural land can boost your retirement account like no other asset class. With us, it’s never been easier to buy farmland and add it to your retirement account and self-directed IRA, and you can get started by checking out our currently available farms and then filling out the form below.