Highlight / March 19, 2021

Financializing Farmland: The Pros and Cons

The financialization of farmland has caught many by surprise.

Some react with alarm and concern while others seem to be cheering it on.

With more experts paying closer attention to the nexus of issues and challenges in the financialization of farmland, what are the pros and cons of this trend and why does it matter?

What is the Financialization of Farmland?

The financialization of farmland refers to the integration of farmland assets into the broader financial environment.

An increasing amount of farmland is being bought up by private equity funds, public and private pension funds, foundations, university endowment funds, insurance companies, and wealthy individuals.

We recently touched on this in our article, Why Bill and the Mega-Rich are Buying Farmland, about Microsoft founder Bill Gates now owning more farmland in the US than anyone else. Bill’s purchases don’t exist in a vacuum – they’re part of a wider trend.

Quality farmland is seen by many as a good investment from a strictly financial perspective because it’s historically stable relative to stocks and bonds and helps diversify investment portfolios.

Those who buy the land might hang onto it and rent it to independent farmers, thereby realizing a steady flow of income and long-term capital gains. In other cases the farmland is sold after a time to realize more immediate capital gains if it has appreciated significantly in value. In either case, it’s a unique combination of income and appreciation.

And yet, the overall percentage of US farmland that is owner operated hasn’t really changed all that much over the past 50 years. It currently sits at just over 60%, according to the USDA 2017 census of agriculture data. Clearly, people want to access farmland as an asset class without having to operate it themselves.

The data on this topic is telling. For example, the average age of principle farm operators has gone up in every ag census since the early 1980s and is currently 57.5, according to the 2017 USDA census. In other words, there are a lot of farmers who are old enough that they may soon be seeking to sell their land – and institutional investors are lined up to buy.

 

Given the age trend among farmers combined with the wide appeal of farmland investments, it’s reasonable to assume the financialization of farmland will increase in years to come. But does it matter in the long run who owns farmland?

This trend of treating farmland as a new and attractive asset class didn’t even start picking up steam until after the 2008 financial crisis resulting in the Great Recession, so it’s too early to know what the long-term impacts may be, but plenty of ideas are out there about the pros and cons of farmland financialization.

 

Concerns About Financializing Farmland

 

Treating farmland as a publicly traded asset was first proposed in the US back in the 1970s, but when Congress held hearings about it in 1977, the idea was called “morally reprehensible.” But why? Here are a few potential downsides of farmland financialization people have pointed out:

 

  • Separating Owner from User: Some view creating more distance between the landowner and the land user as a bad thing as it increases barriers to entry for new farmers—entry barriers that are already viewed as incredibly high to begin with.

 

  • More than a Mere Asset: Another criticism is that farmland and the act of farming, things everyone depends upon for sustenance, is too important to be treated as just another piece of an investment portfolio. Will large financial players treat farmland and farmers with the dignity, respect, and care they deserve?

 

  • Some Farmers Are Wary: Echoing the above, if you speak with farmers themselves about financialization, some are downright worried about “faceless” financial actors who own the land. When there is a lack of transparency or meaningful relationship between owner and user, it can leave farmers feeling like the new power balance is one that favors “corporate” interests over traditional farming values.

 

These potential downsides of farmland financialization haven’t been extensively documented, which doesn’t mean they aren’t legitimate concerns. It just means the financialization trend hasn’t been around long enough and isn’t extensive enough to see if any of them will pan out into full-blown problems.

But with the right type of structure, farmland as a financial product can become beneficial for investors, farmers, the environment, and the community.

The Pros of Farmland Financialization

The potential upsides to financialization of farmland must also be discussed within a context of “wait and see,” though there is more visibility into some of them as outlined below:

 

  • Capital Improvements: When large financial players get involved in owning farmland, they naturally bring huge amounts of liquidity into the farmland market, and some of that liquidity can be applied as capital for making improvements to farming operations such as better irrigation, more storage, better equipment, and so on. These can be handled in sale-leaseback transactions to provide farmers with capital they otherwise wouldn’t be able to access.

 

  • Efficient Debt Capital: Farmland debt makes up a surprisingly small percentage of the total value of farmland: 9% of an overall asset value of $3.18 trillion. In other words, from a financial perspective there is plenty of room to use debt capital to reduce the overall capital component of agricultural production.

 

  • Sustainability: Many of the financial actors involved in financialization understand concerns about sustainability and have openly committed to playing a positive role promoting and advocating for greener, planet-friendlier agriculture. It’s a growing concern across society in general, and falling in line will benefit them as sustainable farm asset appreciation will eventually outstrip that of farms who don’t adopt sustainable practices.

 

When farmland financialization really took off after the Great Recession, many feared it was going to be the next big bubble that would grow like gangbusters and then burst and wreak all sorts of havoc. But things have evened out and now seem to be proceeding at a reasonable pace instead of the mad rush “landgrab” feel the market had five or six years ago.

Financialization Varies Widely Around the World

 

It’s also important to recognize that this situation can play out very differently depending on the country in which it’s taking place. The farmland financialization we’re talking about in this article is based on the US experience so far, although it’s likely similar in other highly developed nations. In developing nations, the financialization of farmland can be even more impactful, as capital tends to be scarce, and the potential for appreciation can be much higher as market access and infrastructure improve.

The financialization of farmland has the potential to revolutionize the agriculture industry. With access to new sources of capital comes the capacity for better technology, expansion, and more sustainable practices. When farmland financialization is handled within a partnership framework between the landowners (financial actors) and the land users (farmers) who all want to do well while doing good, the end result can be a virtuous cycle with positive impacts for all stakeholders.

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