The Best Way to Invest in Farmland in 2023

One method stands out among the passive farmland investment options.

Once upon a time, farmland was largely owned by farmers.

These days, however, farmland is changing hands—and fast. While family-owned farms continue to account for more than 95 percent of farmland in the U.S., it appears as though the next generation isn't interested in tilling the soil of their predecessors and owning farmland.

Today, nearly 35 percent of all farmland owners are aged 65 and over, while only 8 percent of farmland owners are under the age of 35. 

“In the next five years, around four million acres of farmland a year will exchange hands in the U.S., partly driven by the generational transfer of assets,” Martin Davies, CEO of Westchester, the global agriculture arm of Nuveen, told IPE RA magazine. “People that have inherited land don't want to farm it.”

And so, a highly rewarding asset (one that beats most other asset classes), once available only to institutional investors and generational farmers, is becoming accessible for your average investor.

The Opportunity Presented by a Farmland Investment 

As the previous generation of farmers ages out of agriculture, farms and agricultural real estate that traditionally would have been passed on to family members are instead sold. 

From a practical perspective, this transfer might make sense, as the prospect of actively farming inherited land can seem daunting. But through the eyes of an investor, this trend is somewhat surprising. 

Not only do owners stand to benefit from land appreciation and rent payments, but many also receive stable income through sales of crops and other farm-based products. Further, as a physical asset, farmland is a powerful lever individual and institutional investors can use to diversify investment portfolios and hedge against economic volatility.

As the amount of land available to farm shrinks, investors have a historic opportunity to add farmland to their portfolios as new and innovative ways to invest in farmland emerge. 

Recession- and inflation-proof investment

Regardless of where we were in the economic cycle, farmland returns have been relatively stable. Whether through the Great Recession of 2008 or the dot-com crash of the early '00s, farmland investments demonstrated the ability to make a return even in the toughest of times.

Further, in when inflation is high, farmland benefits from its stability as a physical asset class and investors are rewarded with steady income from crop sales.

Scarcity leads to value stability 

The total amount of arable land is fixed in most areas. Scarcity is an essential aspect of what makes agricultural land strong through challenging times or periods of high inflation. 

But the overall amount of U.S. farmland has steadily declined since the 1950s. Changing climates, degrading land, and a weakening desire to be a farmer in the U.S. mean we've likely hit peak farmland.

Growing demand for food

Simultaneously, a growing world population creates an increasing global food demand. In light of shrinking farmland in traditional locations, many types of agriculture will need to find new producing countries.

Taken together, along with farmland scarcity, the ongoing need for sustenance for a growing population supports increasing agricultural prices and consistent returns for farmland investors.

The multitude of farming opportunities 

There are many ways to improve your portfolio's diversification with a farmland investment. The most well-known might be entering the business through active farmland ownership, but there are other enticing methods as well. 

Working the land yourself can be a rewarding investment of time and resources. But it can require immense effort, and there are other, more passive avenues for investors to generate solid returns with farmland. 

What Does Active Farmland Ownership Require?

Before diving into passive farmland ownership, it's essential to understand what active ownership in farmland as an asset class entails.

Active farmland investment typically refers to farmland you purchase and manage yourself.

Not only do the high capital requirements make purchasing a farm cost-prohibitive for many individuals (especially with farmland values rising almost everywhere), but active farming is hard work. Long hours are standard, along with the tough, hands-on effort that requires in-depth knowledge and years of experience. 

There are a few things every potential farmer should know before leaping into active farmland ownership.

Not all soil is suitable for growing crops 

The proper soil profile is critical for generating consistent farmland returns. 

Different crops prefer different types of soil. For example, most plants don't like sandy soil, but it can be used to grow melons and coconuts. 

Further, solving soil problems can be costly—if they can be solved at all. Before purchasing a farm, it's essential to research the history of the soil to determine whether it will sustain your business plan. 

Many environmental factors determine your success 

Just as not all soil is suitable for growing all types of crops, not all environments are suitable for agriculture. Rainfall, freezes, temperature, length of the growing season, and natural disasters will be significant factors in the success of your investment.

Some crops, like rice, require warm temperatures and lots of rain. Meanwhile, wheat and other row crops prefer much drier weather.

Selecting products that match your growing conditions could make or break your active farming venture.

Water: A key ingredient for farming and life  

Regardless of your climate, most crops demand a plentiful water supply for good yields and consistently high food production. 

In addition to assessing available water sources, you'll need to familiarize yourself with local water ordinances and restrictions. For example, shrinking groundwater reservoirs and frequent drought conditions have led to strict regulations in California, where water has become a critical topic.

Image Source

Ever-present supply chain risk 

Assuming you've solved the first three critical challenges to active farmland ownership, it's challenging to generate a return on your crops without a robust supply chain. 

In addition to environmental risks to the crops, farmers are impacted by threats like economic instability, transportation interruptions, and supplier inconsistency. These adverse market conditions can lead to supply chain risks, making your farm business vulnerable to losses and disruption. 

While growing and harvesting a healthy crop is crucial, generating cash requires delivering those crops to consumers.

Hard work and long hours

Last but certainly not least, farming is hard work. Even if you can afford to hire help to handle sowing seeds, plowing fields, mending fences, harvesting products, etc., there's other work to be done.

Someone needs to manage the laborers you've hired while negotiating prices and contracts, maintaining the customer base, and keeping an eye on the market.

Growing crops through active farmland ownership can be a rewarding investment opportunity, but it's not an easy endeavor.

Without significant sums of startup capital, experience, time, and patience, generating consistent farmland returns is a challenging prospect. 

Passive Farmland Investing: An Overview

Today, agricultural investing isn't restricted to active farmland ownership. The agricultural economy is massive. In 2022, its total global value is projected to be over 12.1 trillion U.S. dollars. 

This significant chunk of the global economy means there’s a large (and growing) number of options for passive farmland investing that don't require any knowledge, experience, or actual farming.

The wealthiest investors own farmland

Investors are catching on—and reaping considerable rewards. Bill Gates, the largest private owner of farmland in the United States, is not a farmer, nor has he ever been. Warren Buffett, considered to be one of the most successful modern investors, has owned farmland for more than three decades, despite admitting that he knows nothing about farming. 

These two greats see farmland investing as providing benefits that mutual funds, ETFs, and other common asset classes cannot: passive income and stable returns through increasing land values. Farmland can also act as a powerful lever for adding diversification to your portfolio with a low level of volatility.

In a letter to his shareholders, Buffett called the farm one of the best investments he ever made. “Now, 28 years later, the farm has tripled its earnings and is worth five times or more what I paid. I still know nothing about farming and recently made just my second visit to the farm,” he wrote.

Who can passively invest in farmland?

Great investors like investing in farmland, largely because of the stable return and peace of mind that comes from owning a tangible asset. But what about everyone else?

Fortunately, access to passive farmland investments isn't limited to high-net-worth individuals and accredited investors. It's now possible for nearly everyone to invest in farmland. The barrier to entry is low, and anyone can get started with a relatively small investment amount.

5 Options for Passive Farmland Ownership

Investors looking to follow in the footsteps of these financial giants and invest in agriculture have several options. 

Here are five accessible methods investors are using to invest in farmland in 2023 without actually buying a farm or knowing anything about farming. In most cases, it's not even necessary to set foot on a farm (if you don't want to). 

1. Agricultural Stocks 

One traditional option for passive farmland investing is to purchase shares in publicly traded companies active in the agriculture industry. Agricultural businesses can be involved in any aspect of the massive supply chain, from manufacturing farming machinery and irrigation equipment to transporting produce to supermarkets.

Agricultural stocks can also be purchased in businesses that produce specific products like fruits and vegetables, grain, tobacco, fishing, and livestock.

2. Agriculture ETFs

There are also agriculture exchange-traded funds (ETFs), which allow you to purchase a professionally managed collection or “basket” of stocks in companies belonging to different sub-sectors of the farming and agricultural industry.

An exchange traded fund can be a handy way to gain diversified exposure to the agricultural industry without extensive experience in the sector.

An ETF may include many different agricultural businesses, from farm equipment and seed companies to fertilizer producers and grain traders. But it won't give you direct exposure to actual farmland. That's why ETFs can't offer the same stability as investing directly in land.

3. Agricultural Mutual Funds

Like ETFs, agricultural mutual funds represent a basket of individual stock of agriculture-related companies overseen by professional portfolio managers.

A key difference to ETFs often includes a higher minimum investment for mutual funds, which tend to be more actively managed and traded at the end of each trading day. Again, you might only be investing in agricultural commodities and not the agricultural land itself.

4. Farm REITs

Real estate investment trusts (REITs) are companies that invest in income-producing real estate. 

REITs can be found for virtually every kind of real estate sector—including farming. Farmland REITs typically buy multiple farms in different geographic areas to lease to farmers.

Compared to actually purchasing farmland, farmland REITs offer an opportunity for greater diversification and liquidity since REITs can be easily traded on stock exchanges. They're also more affordable, as the minimum investment is typically a single share. 

What makes these four methods suboptimal for farmland investment?

Although they give you some of the advantages of passive farmland investment, there are significant drawbacks with these four methods. Because stocks, ETFs, mutual funds, and REITs are all publicly traded, they are subject to the same risks as your existing portfolio of stocks—namely, high volatility and sentiment-driven swings.

This means that when the stock market crashes, it will likely take your publicly traded agricultural stocks, ETFs, mutual funds, and REITs down with it.

Further, and perhaps one of the biggest drawbacks of the aforementioned approaches, you don't have control over your own assets. Investing in those investment vehicles means important decisions regarding your finances are left in the hands of others. 

This brings us to our fifth and final option for farmland ownership: investing in farmland via an online platform.

Option #5: Online Platforms Offer the Best Access to Farmland

There are a growing number of online platforms that provide individuals with direct access to farmland investment opportunities. They typically work by allowing investors to purchase shares of various pre-vetted farmland properties and collect rental income and a share of harvest profits every year. 

The top platforms might be the most practical way to access the potential of a farmland investment. Each offers unique opportunities based on the investors’ desired ownership model, type of crops, and geographic area. For example, as the supply of prime farmable land in domestic markets becomes increasingly limited, there will be a growing number of international opportunities. 

It’s worth mentioning that not all of these platforms require you to be an accredited investor. That means that even individuals with an average annual income of less than $200,000 U.S. ($300,000 U.S. for married couples) can enjoy access to some of these opportunities. 

Farmfolio, for example, lets accredited and non-accredited investors directly purchase and own portions of Tahitian lime farms (called LOTs) as part of a larger Colombian farm. Further, the platform’s unique, vertically-integrated supply chain ensures limes grown on these farms easily make their way to United States consumers.

And if you decide that it’s time to sell, investments through the Farmfolio platform enjoy no minimum holding period and a relatively high level of liquidity compared to other platforms.

Image Source

LOTs: An Innovative Approach to Farmland Ownership

Taking a closer look at LOTs, they truly are an innovative solution to the problems associated with traditional farmland investing. Also known as Land Ownership Titles, these LOTs are subdivided pieces of a larger farm available for direct purchase by both accredited and non-accredited investors.

They offer potential owners the chance to buy farmland as part of a pre-developed, vertically integrated, turnkey system. A Farm Owners Association (FOA) oversees the lots and hires a third-party management team to handle everything involving farmland production, including planting, land maintenance, harvesting, and sales.

These farmland partners have extensive farming experience and handle not only crop production but also consistently work to help your land generate higher yields. Farmfolio has no minimum holding period, which means as a LOT owner, you will continue to receive the harvest revenue until you decide to sell your legal title to another investor or pass it down to a beneficiary. 

Why Passively Invest in Farmland in 2023?

Farmland investing offers a great addition to any portfolio. As a physical asset with consistent income through crop sales, the asset seems to have the ability to generate stable returns for investors through a variety of economic environments.

One thing is clear: a direct investment in farmland ownership gives you more control of your assets than through REITs, stocks, ETFs, or mutual funds.

At Farmfolio, you can invest directly in LOTs as part of existing high-performing farms in emerging markets. This innovative program allows you to purchase real land that is producing real fruit that's in high demand and is sold around the world from successful Latin American farms.

Farmfolio LOTs have produced consistent results and stable growth with historical returns that rival other asset classes. Visit our opportunities page to learn more about our currently available farmland investments, or simply fill out the form below to find out how you can add farmland to your portfolio and generate income from agricultural products with less volatility than other assets.