Why Owning Farmland In A Retirement Account Can Be A Smart Move

Farmland ownership 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, both small and institutional investors are focused on choosing the right asset with low volatility 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 agricultural land such as farmland?

While there are no guarantees when investing, the answer for most people is yes, owning agricultural land can be a good investment, especially in times of higher volatility and uncertainty. This sentiment is shared by beginning farmers, smaller family farm operators, retired farmers with significant land tenure, and even institutional investors.

Maybe it’s the ongoing for food and grocery shortages that has elevated the potential of agricultural products and farmland in the minds of many. But for whatever reason, these are several aspects and 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, land ownership that offers agricultural production can produce relatively steady gains with less volatility compared with most other asset classes, even those considered historically safe, such as REITs.

In addition, there’s almost 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

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Farmland is considered an inflation hedge compared with other asset classes, 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, what new developments may occur, 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 with a strong average annual return without being affected by inflation. When inflation hits, asking prices for inflation-hedged items that are a real asset (e.g, houses, farmland, metals, collectibles, etc.) actually increase in value, which allow with other factors help to balance out your portfolio when any gains in other assets can’t keep up with rising prices overall.

3. Farmland Ownership 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, the land prices of 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, both small farms and the some of the world’s biggest farmers are trying to support a growing global population. Focusing on high-value, in-demand specialty crops (such as limes, mangoes, avocados, etc.) can be a prudent way to buy land and 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 when looking at U.S. farmland, 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 change in land use and corresponding reduction in farms and farmers 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 land 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 and other agricultural land use, which helps protect the value of farmland over time and can offer significant upside to those who purchase land.

Avoiding Retirement Account Penalties With Farmland Ownership 

Now that you’ve seen the benefits of farmland ownership and 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 agricultural land like 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 and reap the benefits of food production and the increase in farmland prices but do none of the heavy lifting as the work is done by farm operators, thereby avoiding any tax implications. The land is your own land and 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 as part of your succession planning.

Start The New Year With Farmland

Owning farmland could be one of the wisest decisions you’ll ever make, particularly in times of rising global demand for food, but also rising uncertainty, volatility, and interest rates, especially when compared with the relatively stable past decade. Interested in farmland investing and 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.

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