3 Major Factors To Consider When Buying Farmland

When someone mentions farmland, what comes to mind? If you’re like most people, you probably imagine flowing fields of wheat or endless rows of corn. Perhaps you think of the American Heartland, and the vast, flat expanse of grains like rice, sorghum, and barley. For most people, that’s what farmland is. And when it comes to buying farmland, that’s often what people first consider.But farmland as an asset class is far more diverse and dynamic than what people commonly believe. Let’s take a closer look at the factors that can make or break a farmland investment.

1. Crop Type

Broadly speaking, crops come in two types: row crops and permanent crops. It wouldn’t be fair to say that one type is better than the other - both offer unique characteristics that can meet the needs of different investor profiles.Let’s start with row crops. In the U.S., row crops represent nearly 75 percent of all cropland, with the dominant crops being wheat, corn, and soy. These crops are planted and harvested in a single season, and they need replanting every year. Row crops are often staple grains or feed grains, and they form a vital part of the agricultural landscape. But they don’t always suit the needs of investors. In terms of appreciation, the average prices of U.S. farmland - mainly row crops - actually decreased from 2019 to 2020 by 0.1 percent.Yield has not fared much better. Row crops, especially grains, are facing increasing competition from major agricultural producers like China and Brazil, forcing many producers to rely heavily on government subsidies. Permanent crops, by contrast, do not need to be replanted every season, and they can generate cash flow over a longer period of time. While they do take longer to begin their productive lives, they can often be more attractive to investors.Because permanent crops can produce over the long term without the need for seasonal replanting, the value of the underlying land often appreciates faster than with row crops. Additionally, permanent crops are often more niche products - think mangoes, avocados, and limes - and consequently they can see higher cash yields than everyday crops like rice and soy. These goods often feature more dynamic markets and higher growth potential. Time horizon, risk tolerance, and exit strategy are all important factors to consider when it comes to crop type. But for those interested in farmland as an asset class, permanent crops are an increasingly popular choice.

2. Crop Variety

When we talk about farmland, we’re really talking about crop production. And no two crops are the same - even within a single crop type, there can be tremendous differences in terms of varieties. Making an informed decision on crop type is about more than just market preferences. It’s about understanding why certain types are favored over others. A thorough assessment of market drivers is key to crop variety selection. For example, do consumers favor a particular color, size, or flavor profile? Take apples. Over the years, consumer preferences have shifted, resulting in huge gains for some growers and crushing losses for others. In the 1980s and 1990s, the Red Delicious variety fell out of favor with consumers. It’s not hard to understand why - despite its attractive coloring, the Red Delicious had little to offer in terms of flavor or texture. Over the years, consumers gravitated towards crisper, sweeter varieties like the Gala and Fuji. With new varieties of even the most common crops being created every year, there’s always a bit of guesswork in selecting the right crop variety. But with a clear understanding of a crop’s demand profile, farmland owners can generate higher returns.

3. Location

Buying farmland is essentially a real estate acquisition, and as such it’s impossible to overstate the importance of location. You don’t have to be a farmer to assess the potential of an area for quality farmland. You simply have to develop a strong understanding of the value drivers. Some of these values are natural - things like climate, altitude, soil profiles, etc. - and some are man-made, like infrastructure, market access, and labor availability. In terms of the natural factors, you can never have too much information. For example, average annual rainfall is a critical factor. Many investors look to farmland simply as a means of exposure to water as a commodity. Altitude is another key factor. Even for a single crop variety, a difference in altitude can produce wildly different flavor profiles, colorations, and even sizes. Regions with distinct microclimates, some only a few square miles in area, can be especially productive. Man-made factors are equally important. Any savvy farmland owner will be very familiar with the entire supply chain, including how the product is processed, how it is shipped, where it is highest in demand, how the consumer uses it, etc. The more integrated the supply chain, the better. Farmland owners can be negatively impacted by middlemen such as importers, distributors, transporters, etc. For farmland, a vertically integrated structure is key. Consistency is at the forefront of the value proposition of farmland ownership, and to achieve consistency in returns, you need consistency in pricing. This means developing close relationships throughout the supply chain. For example, a good fruit buyer will have a very clear picture of the volume of fruit they’ll need, the price they’ll be able to pay for it, and what quality specifications they require. Farmland owners can rest easy if the location of their farmland offers well-developed supply chains.

Final Thoughts

It goes without saying that buying farmland can be complex.But, for anyone thinking about buying farmland, it’s critical to understand the vastness of the space and the sheer variety of choices available. Farmland is more than corn and wheat and soy, and it goes far beyond the developed world. Too many potential farmland owners limit themselves by only considering U.S. row crops. Farmland as an asset class is far more diverse. If you’re looking for non-correlated, inflation-proof returns over the long-term, farmland is a very attractive option. For more information on how you can make a confident, informed decision on owning farmland, download our free Farmland 101 guide. In it you’ll learn more about farmland ownership and the process involved. At Farmfolio, we’re committed to making farm ownership easy and providing opportunities to only the highest-quality farmland. Our Land Ownership Titles (LOTs) program takes the uncertainty out of buying farmland, and features integrated solutions for farm management and commercialization. With LOTs, you own more than a piece of farmland - you own a pre-developed, vertically integrated structure for agribusiness designed to deliver consistent passive income year after year. Click here to learn more about how you can own real assets in farmland through LOTs.