Farmland continues to be an attractive long-term investment.
Now that we’re at the start of a new year, many people are thinking about their retirement accounts and how to maximize their contributions over the next twelve months. With inflation on the rise, the focus on choosing the right asset to maximize long-term appreciation is even more of a consideration. One question that many individuals are asking is should they use their IRA to purchase farmland?
While there are no guarantees when investing, the answer for most people is yes, especially in times of volatility and uncertainty.
Maybe it’s the ongoing food and grocery shortages that has elevated the potential of farmland in the minds of many. But for whatever reason, these are just some of the benefits to adding farmland to your retirement account:
1. Farmland Diversifies Your Portfolio
Savvy investing means never putting all your eggs in one basket. When one asset class starts dipping in returns, you need assurances that the others won’t be negatively affected.
Overall, farmland produces relatively steady gains with less volatility than other assets, even those considered historically safe, such as REITs.
In addition, there’s no correlation between farmland and stocks, bonds, and other traditional asset classes. When other markets are volatile, farmland remains relatively stable, which can give your retirement portfolio the chance to continue making gains.
2. Farmland Is A Strong Hedge Against Inflation
Farmland is considered an inflation hedge, and that’s what investors really need right now. The last 12 months have brought a serious increase in inflation at 7.0 percent annually, the highest since 1982. Many experts believe that inflation is only going to get worse before it gets better, and even though pricing pressures may start to ease in 2022, no one knows when this will happen or how much of a difference it will make.
That’s another reason why farmland is getting so much attention right now. Many feel that farmland is preferable to gold because it produces a positive cash flow and isn’t affected by inflation. When inflation hits, asking prices for inflation-hedged items (e.g, houses, farmland, metals, collectibles, etc.) actually increase in value, helping to balance out your portfolio when any gains in other assets can’t keep up with rising prices overall.
3. Farmland Generates Multiple Sources of Revenue
Building on our earlier idea of not putting all your eggs in one basket, farmland by itself is a highly diversified asset class. And one of the things that makes it so unique is that it offers multiple revenue sources.
First and foremost, there is value in the land itself. USDA data shows that the value of farmland is on rise, jumping $220 per acre (7.0 percent) between 2020 and 2021. That figure is even higher for cropland (a 7.8 percent increase to $4,420 per acre), while pasture land saw a 5.7 percent increase during the same time period. Historically, farmland has continued to climb in value, nearly doubling between 2007 and 2021.
Additional revenue comes from the goods the farm produces. From row crops to citrus fruits to raw materials like cotton, the world’s farmers are trying to support a growing global population. Focusing on high-value, in-demand crops (such as limes, mangoes, avocados, etc.) can be a prudent way to lower your portfolio risk while increasing the overall value.
4. Farmland Has Built-In Scarcity
As a society, we cannot live without farms and the goods that they produce. And yet, just 10 percent of the land in the world is dedicated to farming. And that figure is shrinking.
Take for example the United States, where the 2017 Census of Agriculture found that farmland decreased from 914.5 million acres in 2012 to 900.2 million acres in 2017. Recent USDA data shows that there were just over 2 million farms in the U.S. in 2020, down from 2.20 million in 2007, and much lower than the peak of 6.8 million farms in 1935. This reduction has happened even while the average farm size has remained relatively unchanged at about 444 acres.
Applying the basic laws of supply and demand, less farmland and greater scarcity can influence the value of farmland overall, and this relationship can be even stronger in emerging markets like Colombia. Combined with a growing global population and a growing demand for food, farmland’s built-in scarcity makes it one of the few asset classes with endless demand. And even though more residential or commercial land may at some point be converted to farmland, it’s unlikely that large tracts of land will be reallocated to farming, which helps protect the value of farmland over time.
Avoiding Retirement Account Penalties When Owning Farmland
Now that you’ve seen the benefits to adding farmland to your retirement account, it’s important to understand how to avoid the IRS considering it being a prohibited transaction and subjecting your entire self-directed IRA or 401(k) to tax.
Owning farmland in a retirement account will only open you up to taxation if you also intend to farm the land yourself. Follow these guidelines closely to avoid any surprises:
- You or someone closely related to you cannot work on the farm in any capacity, even if it’s just mowing the grass or changing a lightbulb
- If you finance the purchase of the farm, it must be a non-recourse loan with no personal liability or guarantees of the debt
- If you rent the farmland to a third party, rent should be priced based on current market conditions
These factors could make owning farmland a slippery slope, but that’s only if you intend to work the farm yourself.
A better option is to passively invest in farmland. You maintain direct ownership but do none of the heavy lifting, thereby avoiding any tax implications. The land is still deeded in your name, you receive your share of the harvest income, and the land can be passed to a beneficiary or transfer ownership.
Start The New Year With Farmland
Owning farmland could be one of the wisest decisions you’ll ever make, particularly in times of uncertainty and volatility. Interested in adding farmland to your retirement account? Fill out the form below to speak with one of our Farmland Specialists and get your new year started with the potential for long-term gains.