Is Farmland Still a Smart Investment in 2022?

How do you make money with farmland?

If you're a seasoned investor, you've probably at least considered the wealth-building benefits of including farmland in 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 leading asset classes available to investors today, and it's more achievable than ever.

From 2000 to 2020, U.S. farmland returned an average annual rate of 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 to achieve impressive returns from agricultural commodities and land.

Where the opportunity is

Investing in agricultural land makes intuitive sense because farmland itself is a limited and diminishing resource. 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.

At the same time, as farmers retire in unprecedented numbers, investors have accelerated opportunities to purchase income-producing land.

What drives farmland returns?

One of the main reasons farmland is such a good investment opportunity is the variety of opportunities to create profit streams and facilitate wealth. This is especially true during times of high inflation. Farmland values have historically had a highly correlated relationship with inflation because when food prices rise, farmers receive higher crop prices, and their land becomes more valuable as a result.

Land value

Increased land values are a significant driver of profit for investors who choose farmland. According to data from the NCREIF farmland index, land prices have increased by an average of more than 6 percent every year for the last five decades, with values decreasing only during five years in that period.

Based on this data, 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.

Crop yield

When you buy farmland, you can also derive significant returns through crop harvesting and sales. Yields and time to harvest vary by crop, but double-digit returns are achievable in many areas. The current historically high rate of inflation has been a boon to many farmers, with a number of commodities reaching record-high crop prices, such as wheat.

Food is an asset class that will remain in high demand even as prices soar—one of the reasons farmland is such a stable, income-producing investment.

Tax benefits

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. Conservation tax credits require the land to be placed in a trust to preserve the land's natural resources.

Farmland investment options

Farmland investors don't have to be familiar with crop types or know how to grow food to achieve impressive returns. More investors are realizing the value of farm-related stocks, passive ownership that generates income with no work required, as well as other alternatives to becoming full-time farmers.

Agriculture-related stock market investments

If you're not interested in direct farmland investments, investing in farmland on the stock market provides an alternative to active farms.

Due diligence can help you find farm-related investments throughout the food supply chain, from machinery and equipment to produce, grain, livestock, and tobacco companies. Many investors even invest in shares of supermarkets.

Investors who don't have the time to actively manage their stock market portfolio can purchase exchange-traded funds that focus on farms. Professionals select the stocks for you in various subsectors of farming, so you can earn money from this type of real estate investment even as a novice who knows little about farmland.

Farmland investing through REITs

Investing in real estate investment trusts (REITs) is another way to create passive income from 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 buy shares in companies that own an agricultural portfolio, then benefit from the profits of these investments. If you're a new investor, you can start small by purchasing just a few shares of a REIT without much upfront capital.

Agricultural private equity

There are various private equity funds available that focus their investments on farmland and food production. These funds have become more attractive to investors and grown in number and size, especially as food prices continue to soar.

However, these funds typically require a minimum investment above a million dollars, may have a 10-15 year lock-up period, and often come with very high fees.

Buy land directly

You don't have to be an agriculture expert to produce a strong income from investing in farmland. Farmfolio allows you to buy valuable, profitable physical farmland on your own terms without committing to the hands-on everyday aspects of farming.

This type of ownership is extremely attractive to investors because it means they receive direct land ownership in a specific farm, not shares of a company or fund. Additionally, this ownership structure allows for increased diversification through low investment minimums and a multitude of agricultural investments to choose from.

Expert agriculture teams cultivate and harvest the land to optimize your farmland returns. Your farmland partners take care of managing the real estate, property, and equipment, harvesting and packing crops, and handling sales, allowing you to build passive wealth in the farming sector.

How does farmland compare to other types of real estate?

Is farmland a good investment? The answer is a resounding yes when we look at how it stacks up against other investment classes in the area of real estate investments.

Market share

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 CRE with a value of $2.9 trillion and farms just slightly behind at $2.5 trillion.

As farmland prices continue to rise, this subsector will remain a solid investment for the foreseeable future.

Return performance

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.

Considerations if you want to invest in farmland

Here are some of the main areas investors should explore when they decide to diversify their other assets and become active or passive farm owners.

When to invest in farmland

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.

As noted above, owning farmland becomes less realistic for future generations as the amount of available acreage declines dramatically every decade. According to the New York Times, only about 20 percent of U.S. farmland is currently suitable for crops.

How to choose your crop wisely

If you plan to own crops as a farmland investor, you must select either annual row crops or permanent crops.

Permanent crops

Permanent crops don't need to be replanted every year and produce perennial harvests. Examples of permanent crops include limes, almonds, avocados, and other fruits or vegetables that grow on vines or trees.

This farmland sector has a maturation period before you can profit from your investment. Some of these crops, such as pecans, have a longer maturation period but can produce up to a century of solid returns. Others, like almonds, peak faster but have a shorter period of peak productivity.

Annual crops

Annual crops, also called row crops, have to be planted and harvested at least every year. This broad category includes soybeans, corn, wheat, lettuce, rice, squash, peppers, alfalfa, and many other crops. These harvests require less cash upfront but result in lower annual profit yields. However, they also display less volatility and offer more flexibility compared to the attributes of permanent crops.

Role of farmland in your portfolio

Farmland can serve as a cornerstone of a balanced 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.

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 this type of investment before you add open land to your portfolio.

Here are the risks to consider before you put money into a farm:

• Lack of liquidity, 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, you can mitigate many of these risks with the right amount of due diligence. With its low correlation to economic downturns and strong historical performance in comparison with other asset classes, farm real estate represents a grounding force in your portfolio that can also drive long-term wealth.

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