And how can you make money with what is considered the world’s most valuable asset class?
If you’re a seasoned investor, you’ve probably considered the wealth-building benefits of adding farmland to your investment portfolio and following the example of many renowned billionaire investors, from Warren Buffett to Bill Gates. Simply put, farmland investing has proven itself to be one of the most desirable asset classes available to investors today, and access is easier than ever.
One of the main reasons investors love farmland is for the returns. From 2000 to 2020, U.S. farmland returned an average annual return of 11 percent, keeping pace with the stock market over the same time period but with significantly lower volatility. It has also historically outperformed most other asset classes, including gold, bonds, and commercial real estate.
In this comprehensive guide, we explore the benefits of farmland investing and detail the various ways that you can achieve impressive returns from agricultural commodities and land.
Your FREE Agriculture Investment Guide
Your guide to discovering why agriculture is such an in-demand asset class, what megatrends are driving growth in 2022 and beyond, how to invest in agriculture and assess risk, what crops are global demand leaders, and where the most compelling farmland opportunities are located.
Where the opportunity is
Investing in agricultural land makes intuitive sense because farmland itself is a limited and diminishing resource, especially in developed areas like the U.S. and Western Europe. This scarcity provides near-constant pressure on supply, ensuring price support over time.
American Farmland Trust data indicates that more than 11 million farm acres have succumbed to development in the U.S. over the past 20 years, leaving significantly less land for future generations of farmers.
At the same time, increasing numbers of older farmers are reaching retirement age and retiring in unprecedented numbers. Although there’s a lot of uncertainty about who should succeed them, it has caused investors to accelerate opportunities to purchase income-producing land.
What drives farmland returns?
One of the main reasons a farmland investment is such a compelling opportunity is the variety of options for creating profit streams and facilitating wealth.
This is especially true during times of high inflation. The value of farmland has historically had a highly correlated relationship with inflation, largely because when food prices rise, farmers receive higher returns for their harvests, and their land value increases.
Increased land values are a significant component underpinning double-digit returns for investors who choose farmland. According to the USDA, U.S. farmland prices have increased all but two years over the last three decades.
Based on this, agriculture is the only low volatility asset class to offer such strong returns. Savvy investors are attracted by this rare combination of stability and profit potential.
Harvesting the land creates an essential source of consistent returns for farmers and landowners. It provides a steady income that could be put towards investments in new technology, equipment, and land improvements, as well as distributions to investors.
Food crops are an asset class that will remain in demand even as prices soar. An ever-increasing global population and its need for food are significant factors in making farmland such a stable, income-producing investment.
Some types of farmland investing can provide tax advantages for the owner.
For example, you may be eligible for farming-based tax credits or subsidies on a national or state level, or you could designate a portion of the farmland you own for conservation. Just be aware that conservation tax credits require the land to be placed in a trust to preserve the land’s natural resources.
Scarcity and shifting global supply
As a limited resource, farmland allows investors to benefit from stable demand combined with a shrinking supply. Farmland is likely to become more valuable as land in the U.S. becomes increasingly unavailable or unusable for farming through increased urbanization, climate change, and soil depletion.
Further, the recent tendency toward nearshoring (bringing production to locations nearer to the end consumers in major markets) will push demand for accessible farmland in Latin America higher. While this may not directly impact the value of U.S. farmland, it will give investors an additional attractive reason to invest in farmland, especially abroad.
How does farmland compare to other types of real estate?
Is farmland a good investment? Farmland investments are often compared to other types of real estate investments, such as residential or commercial properties, and the answer is a resounding yes. There are a few key reasons that farmland stacks up quite well against other real estate investment classes.
While many consider farmland a niche investment, it actually ranks third in total real estate market share in the U.S., according to a report from Forbes. Single-family homes top the list, followed by commercial real estate with a value of $2.9 trillion, with farms just slightly behind at $2.5 trillion.
As farmland prices continue to rise, this subsector will likely remain a solid investment for the foreseeable future.
As an investor, you’ll also be impressed to learn about the strong performance of farmland compared to other subsectors in this asset class over the past 20 years. MoneyWise reports overall average real estate returns of 8.68 percent since 2002, compared to 11.98 percent for the average farmland investment.
Part of what makes a farmland investment so attractive is the consistency of the returns.
Population growth means a steadily increasing demand for agricultural products. Not only do landowners benefit from an increasing value of assets, but there are regular returns from harvests that occur at least once a year. Together this helps keep farmland a stable investment, even when other asset classes are experiencing extreme volatility.
Farmland investment options
Investing in farmland and agricultural products presents an exciting opportunity for those seeking to diversify and strengthen their portfolios.
The wide range of options available for accessing this asset class means there’s something for everyone. For example, an investor might choose to acquire a tract of land to actively farm, or they may prefer to invest in a farm-related business through agricultural stocks, ETFs, or REITs. Each option allows investors to access different costs and benefits depending on their individual objectives and needs.
But farmland investors don’t have to be familiar with crop types or know how to grow food to achieve impressive returns. Investors are realizing the value of farm-related stocks, passive ownership that generates income with no work required (sometimes through a crowdfunding platform), and other less active alternatives to becoming full-time farmers.
Agriculture-related stock market investments
Research and due diligence can help you find farm-related investments all along the supply chain, from machinery and equipment to produce, grain, livestock, and tobacco companies. Many investors even invest in shares of supermarkets.
If you’re not interested in direct farmland investments or active farms, the stock market provides an alternative for investing in farmland and other aspects of the agriculture value chain.
Investors who don’t have the time or desire to actively manage their stock market portfolio can also purchase exchange-traded funds (ETFs) that focus on farms. Professionals select the stocks for you in various subsectors of farming, so you can potentially earn money from this type of farmland investment even as a novice with little knowledge about farmland.
While the stock market can be a way to make passive agriculture investments, stock prices (and ETFs that hold them) are highly susceptible to market sentiment. The value of your investment can swing up or down when hedge funds, institutions, and even large numbers of individual investors get excited (or not) about a particular company or sector.
Additionally, when you buy shares in a public company it’s impossible to limit your exposure to the company’s agriculture activities. Buying stocks means investing in the entire business and all of its activities. Further, the percentage of shares held by a typical individual investor grants very little control over the business.
Farmland investing through REITs
Investing in real estate investment trusts (REITs) is another option to access passive income through farmland. There are both private and publicly traded farmland REITs that offer the benefits of farmland investing along with the advantages of stocks.
With this investing framework, you could start small by purchasing just a few shares in companies that own an agricultural portfolio, then benefit from the profits of these investments. REITs are especially attractive to a new investor looking for exposure to farmland real estate.
But because REITs are publicly traded, they are vulnerable to many of the same risks and volatility as stocks and ETFs. A bear market will likely cause REIT shares to experience a similar drop in value. Similarly, the real estate in REITs is often purchased with debt financing, meaning interest rate fluctuations can create an additional level of risk, especially when rates go up.
Agricultural private equity
There are various private equity funds available that focus their investments on farmland and sustenance production. These funds have become more attractive to investors and have grown in number and size, especially as food prices continue to soar.
However, these may be attractive (and riskier) investment opportunities for institutional investors and high-net-worth individuals but typically aren’t accessible to the average retail investor. They often require a minimum investment above a million dollars, have a long-term 10-15 year lock-up period, and come with very high fees.
Directly invest in farmland
Although there are multiple ways to add agriculture to your investment portfolio, many methods rely on publicly traded shares and private equity deals, which come with significant inherent drawbacks. Most striking is the risk associated with a high correlation to overall market sentiment, making those investments a less than ideal hedge.
Fortunately, there are proven methods for making a farmland real estate investment that allows you to participate directly in the returns generated by land appreciation and crop sales.
Farm the land yourself
When considering putting money into a piece of land, many investors might imagine a lengthy process that comes with a lot of research, uncertainty, and stress. Then there are the unfamiliar legal, tax, and financial considerations that are outside the scope of most people’s standard experience.
For some, this makes the thought of buying farmland as an investment a complicated and intimidating prospect. But it doesn’t have to be. There are alternatives to farming your own land where you don’t have to be an agriculture expert but are still able to produce strong income from investing in farmland. You can do this by purchasing already operating and profitable physical farmland on your own terms without committing to the hands-on everyday aspects of farming.
Purchase farmland through a crowdfunding platform
The type of investment offered by many crowdfunding platforms is extremely attractive to investors because it means they receive direct land ownership in a specific farm, not only shares of a company or fund. Additionally, this ownership structure allows for reduced risk and increased diversification through low investment minimums and a multitude of agricultural investments to choose from.
Of course, a genuine farmland investment requires real farmers to generate real ROI. These expert partners cultivate the land, optimize production, and harvest your farmland returns. They take care of managing the real estate, property, and equipment, planting and packing crops, and handling sales, allowing you to build passive wealth in the farming sector.
Choosing the right platform for you
When considering a crowdfunding solution, the right platform is essential for ensuring long-term returns and a positive overall investment experience. Ownership models, fees, who can invest, and flexibility for getting out of the investment can vary significantly between platforms.
For example, some farmland investment platforms are accessible at relatively small minimum investments while others only allow accredited investors and require an initial investment of $50,000+. Some platforms require a holding period of nearly 20 years and others have no minimum and offer a secondary market.
Crowdfunding platforms also offer a variety of ownership models that allow you to access farmland investments in a way that works for you and your portfolio. Finally, closing and annual management fees can have a significant impact on your investment’s long-term yields.
Picking the right farmland investing platform can be a practical and efficient way to benefit from farmland’s dual returns of crop sales and land appreciation.
A few considerations before you invest in farmland
Because there are numerous options for a farmland investment, there are a few aspects to consider when deciding how to become an active or passive farm owner.
Timing your farmland investment
Expert investors agree that acting sooner rather than later can amplify your potential profits from farmland investing. As the nation faces historic rates of inflation and rising interest rates, farmland values provide a stable shelter from the storm.
But according to the New York Times, only about 20 percent of U.S. farmland is currently suitable for crops. As much of the developed world passes peak farmland and the amount of available acreage declines dramatically, farmland prices will likely increase, an already present phenomenon in many parts of the U.S.
While farmland values in the U.S. hit record highs, many would-be farmers looking for small plots are already priced out of the market. With shifting land use and increasing scarcity, it will only become harder to find great local opportunities.
Increasingly, savvy investors will look abroad to nearby places like Latin America for attractive farmland investing possibilities. Don’t wait too long – prices in those locations might also rise as they are discovered by more investors.
“Location, location, location”
The old real estate mantra applies to farmland investments just as it applies to choosing any piece of real estate.
Farmland exists nearly everywhere around the globe, but it’s not all the same. Choosing the right location for a farmland investment is a crucial decision that impacts the economic returns and sustainability of the investment.
As peak farmland in the U.S. puts prime parcels out of reach for new investors, many will turn to alternative locations in developing areas. Latin America, for example, offers attractive farmland due to its favorable climate, abundant natural resources, relatively low costs of entry, and high yields. An emerging market like Colombia is especially attractive because of its diverse topography, stable, pro-agriculture political environment, and robust agricultural infrastructure.
Additionally, businesses in Colombia are incentivized through a range of tax breaks and benefits specifically designed to support foreign investors.
Annual or perennial crops?
When considering farmland, good investment opportunities come in different shapes and sizes. Deciding to buy farmland is just the first of several decisions you’ll need to make, you’ll also need to choose between annual row crops or permanent crops.
Permanent crops have the advantage that they don’t need to be replanted every year and produce perennial harvests. Although the payoff is often greater, this sector does have a maturation period that must pass before you can profit from your investment. Examples include limes, almonds, avocados, and other fruits and vegetables that grow on vines or trees.
Annual (or row) crops must be planted and harvested at least once a year. These harvests require less cash upfront but result in lower annual profit yields. Soybeans, vegetables, corn, wheat, lettuce, rice, alfalfa, and many other cereals fit into this broad category.
The role of farmland in your portfolio
Farmland can serve as a cornerstone of a balanced, well-diversified investment portfolio. Commodity prices, including the cost of food, tend to rise with inflation. This strong correlation allows agricultural investing to protect against inflation, especially compared to high-volatility assets.
As crop prices rise, the value of the land itself tends to increase at the same time, building an even stronger shield against market conditions. However, as with any investment, there are potential risks.
Risks of investing in farmland
When you invest in farmland, you’re investing in a stable asset that continues to produce income even through times of economic turmoil. Careful due diligence can help you weigh the potential drawbacks of an investment opportunity before you add open land to your portfolio.
Here are the risks to consider before you put money into a farm:
- Lack of liquidity, especially with more traditional farmland investments and certain crowdfunding partners, which can make it difficult to exit this investment if needed
- Limited short-term returns and small profit margins if you decide to act as an owner-operator
- Environmental factors outside of your control, such as precipitation and climate or pests and diseases that affect crop returns
- Government factors, such as new regulations and the expiration of subsidies for agricultural real estate
Fortunately, proper due diligence and choosing the right partner can help you mitigate many of these risks. With its low correlation to economic downturns and strong historical performance in comparison with other asset classes, farm real estate can be a grounding force in your portfolio that can also drive long-term wealth.
Is 2023 the year you invest in farmland?
Historically, savvy investors have been choosing farmland to diversify their portfolios and bolster returns. A continuously growing global population means that agricultural products and farmland will enjoy steady demand regardless of the economic situation.
Although farmland in developed countries is becoming scarce and increasingly difficult to access, many nearby emerging markets boast accessible farmland and potential for growth. Low barriers to entry, long growing seasons, and incentives for sustainable agriculture make a country like Colombia an excellent choice for a successful and profitable farmland investment.
Is 2023 the year you choose to access the benefits of farmland investing in Colombia? If so, fill out the form below and someone from the Farmfolio team will reach out to help you get started today.