Crowdfunding is one of the 21st century’s most successful forms of alternative finance. Going mainstream in the late ’90s via the arts and music scene, the number of crowdfunding campaigns in 2020 topped 178.6 thousand.
A report by Global Newswire estimates that the global crowdfunding sector will increase by over $124 billion by early 2025, a CAGR of 16%.
Growth of crowdfunding outpaces that of VC and Angel Investing
Online crowdfunding raises small hunks of capital from large groups of people (often non-accredited investors) spread worldwide. Independent from legacy financial institutions and not glued to a single location, crowdfunded ventures cover a wide range of fundraising goals.
One of these is agriculture. Numerous crowdfunding platforms exist across the agriculture sector, mainly for farmland. The crowdfunding model can be an easy way for investors to gain exposure to the agriculture sector – but the system is not without its drawbacks. Let’s take a look at some of the pros and cons.
Crowdfunding for farmland is attractive for many of the same reasons that farmland as an asset class is attractive – namely, the chance to enjoy the dual benefits of appreciation and cash yields, along with exposure to one of the most essential and secure economic sectors in history.
Farmland as an asset class has shown impressive resilience, especially in times of crisis. While yields can be correlated to commodity prices, and therefore vulnerable to larger trade indicators, the appreciation factor has been rock-solid for decades.
Not to mention that in an inflationary environment, farmland can be an effective hedge. With COVID-19 launching an unprecedented wave of quantitative easing policies from central banks, parking capital in farmland to ride out the inflationary storm is an attractive option.
Another of the major benefits of crowdfunding for farmland is that it lowers the ticket price, eliminating a key barrier to entry in the agriculture space. It also allows impact investors an accessible means of creating measurable social change through the development of rural communities and labor formalization.
The opportunity to own real assets is also very attractive. Investors like participating in structures that are backed by physical collateral. Farmland is an asset class you can actually see and touch – a world apart from traditional investment vehicles.
Crowdfunding for farmland allows investors to take a hands-off position on farmland, allowing them to enjoy returns without having to become directly involved in operations. Nonetheless, the model has its limitations.
There are several issues that farmland crowdfunding platforms face, and potential investors need to be aware of them.
A big one is transparency. Some of the major farmland crowdfunding platforms provide little in the way of insight into operations. For investors who want to look at their holdings in more detail, this isn’t ideal.
Another major flaw with the model is that not all projects reach 100% funding. Considering the time value of money, capital that sits in a project that never reaches completion can represent a significant loss.
Another major weakness of farmland crowdfunding platforms is that they are generally limited to developed markets, specifically the United States. In agriculture, the highest potential lies in regions where there is more room for growth.
Agribusiness in the US is already heavily financialized, and a sizable portion of the sector is dedicated to low-margin, heavily subsidized row crops like corn and soy. High costs in terms of labor and inputs can limit profitability.
Crowdfunding opportunities are heavily concentrated in the US
In emerging markets such as those of Latin America, there is a huge opportunity to convert agriculture into agribusiness, making projects in this region more attractive in terms of yield and long-term appreciation. But these opportunities can’t be accessed by conventional platforms for farmland crowdfunding.
Another factor in the ‘con’ category is the lack of decision-making power on behalf of investors in crowdfunded farmland. If a participant doesn’t like the way the operation is being managed, there isn’t much that can be done – assuming the participant has insight into the operation to begin with.
Lastly, crowdfunding for farmland is not a direct ownership structure. Depending on the platform, you may have a stake in a company that owns the land (often requiring accreditation), or in a fund or similar structure.
Crowdfunding platforms often focus on low-value crops
This can limit access, especially for retirees. While a self-directed 401(k)s or IRAs can access alternative investments such as real estate (including farmland), the same specifications don’t always apply for crowdfunding platforms.
A more attractive option is to hold the title for a piece of land directly in your name, or to have a trusted party hold it on your behalf. But this type of structure simply isn’t possible with crowdfunding platforms.
LOTs: The Pros Without The Cons
Considering the many benefits of farmland as an asset class, it’s no surprise that crowdfunding platforms have tried to connect the space to new participants. In some ways, these platforms have been successful. But in other ways, they’ve come up short.
At Farmfolio, we’ve created a structure that preserves the benefits of farmland crowdfunding while eliminating many of the downsides. This opportunity is called Land Ownership Titles, or LOTs.
LOTs aren’t a crowdfunding opportunity. They’re a fee-simple land sale structure with direct, titled ownership of farmland. This makes you the owner of a subdivided portion of a developed farm project. In the LOTs structure, you are NOT purchasing a security – you’re buying a piece of real estate.
This farmland real estate opportunity is complete with a type of Homeowner’s Association – called a Farmowner’s Association – which can collectively act on behalf of a group of LOTs owners to make decisions about management and commercialization. Farmowner’s Associations grant participants a level of agency that doesn’t exist on farmland crowdfunding platforms.
Like crowdfunding, management and commercialization are handled independently. However, unlike most farmland crowdfunding platforms, LOT owners have direct insight into how these activities are carried out. This high level of transparency is something not seen in conventional farmland crowdfunding.
LOTs provide access to farmland assets in a location where long-term appreciation potential is much higher than in developed markets – Colombia. Colombia’s rapidly developing infrastructure and increasing supply-chain formalization (in part thanks to our efforts) make the country a prime target for farmland allocations.
For those who are interested in farmland crowdfunding but rightly concerned about its drawbacks, LOTs are ideal. You can learn more about LOTs by downloading our brochure. You can also check out the initial series of LOTs – an organic coconut plantation on the Colombian coast – by downloading a brochure about the project.