Have you ever considered investing in farms? If not, you might be missing out on a lucrative and resilient alternative asset class that can diversify your portfolio and hedge against inflation. Farmland investment is not just for wealthy landowners or farmers anymore. Thanks to the emergence of new platforms and vehicles, anyone can access the benefits of owning a piece of the earth’s most precious resource.
In this article, we will explore why investing in farms is a smart move, what are the benefits and drawbacks of farmland investment, and how you can get started with five different ways to invest in farmland. Whether you are looking for income, growth, or stability, there is a farmland investment opportunity that suits your needs and goals.
Why Invest in Farmland?
The sole method for investing in farmland used to be purchasing a farm or pasture, generating returns through cultivation or benefiting from the land’s value appreciation. This required a lot of capital, expertise, and management skills, making it inaccessible and impractical for most investors.
Nowadays, farmland is a viable alternative investment generating returns through both rental yields and the appreciation of the land’s value, no need to work the field yourself. You can invest in farmland through various platforms and vehicles, such as stocks, REITs, ETFs, mutual funds, or crowdfunding. These options allow you to gain exposure to the agricultural sector without having to deal with the operational and logistical challenges of owning and running a farm.
Providing gains from both income and capital appreciation, farmland investments today are somewhat similar to dividend stocks — but better. According to AcreTrader, between 2000 and 2020, farmland in the United States has produced average returns of 12.2%. That’s better performance than the average annual return of S&P 500 stocks, at 10.26% as of 2023.
Benefits of Investing in Farms
Investing in farms offers several advantages over other asset classes, such as:
Inflation Hedge
Historical farmland investment returns consistently surpass inflation rates. Since 1991, the index has delivered returns more than double the inflation rate, offering a reliable hedge against inflation. Farmland prices tend to rise with inflation, as the demand for food and commodities increases. Farmland also produces income from rents or crops, which can adjust to inflation as well. This makes farmland a valuable asset to protect your purchasing power and preserve your wealth in the long term.
Great Diversification Potential
Farmland investment presents excellent diversification opportunities, operating in different cycles than traditional assets like stocks and bonds. Over the last four decades, agricultural land has exhibited a low correlation with stock and bond indexes. This means that farmland returns are not affected by the ups and downs of the stock market, reducing the overall volatility and risk of your investment portfolio. A globally diversified agricultural portfolio further mitigates risk by spreading exposure across various crops, government structures, and climates.
Demand is on the Up and Up
With the global population expected to exceed 9.7 billion by 2050, the demand for crops will rise significantly. Limited arable land amplifies the value of farmland investments. Whether used for farming, renting to agricultural operators, or selling for profit, the increasing scarcity of suitable land for food production enhances the investment’s value. Farmland is also a renewable and resilient resource that can withstand environmental and economic shocks. As long as people need food, farmland will remain a vital and profitable asset.
Potential Tax Breaks
Farmland investors can benefit from various tax breaks and exemptions. Agricultural property may be assessed at a lower rate than residential property, Mortgage interest on agricultural land may be deductible from your federal taxes, and on land that holds a working farm the farming income may be exempt from numerous taxes. Depending on your location and situation, you may also qualify for conservation easements, agricultural exemptions, or other incentives that can lower your tax burden and increase your net returns.
Good Risk-Return Balance
Farmland demonstrates a favorable risk-return balance when compared to other asset classes. Its strong returns per unit of risk make it an attractive investment option. Farmland also has a low standard deviation, meaning that its returns are more stable and consistent over time. Farmland is less prone to bubbles, crashes, or speculation than other assets, as it is driven by fundamental factors such as supply and demand, productivity, and innovation. Farmland also has a long-term horizon, which can smooth out short-term fluctuations and provide steady growth.
Downsides of Farmland Investing
Despite its many benefits, farmland investing also comes with some challenges and drawbacks, such as:
Costly to Get Started
Agricultural sector ETFs often come with high expense ratios compared to other funds. Moreover, many lack liquidity, leading to increased bid/ask spreads, creating more upfront cost for investors. Direct farmland ownership also requires a large initial investment, as well as ongoing maintenance and management costs. Crowdfunding platforms may have lower minimums, but they also charge fees and commissions that can eat into your returns. Additionally, farmland investments may have limited exit options, making it harder to sell or liquidate your stake when needed.
Weather is an Unpredictable Risk
Unlike most stocks in a portfolio that are unaffected by weather conditions, farmland investors must factor in the risks posed by long winters, natural disasters, or insufficient rainfall to the crops and land. Extreme weather events can damage or destroy crops, reduce yields, or increase costs. Climate change also poses a long-term threat to farmland productivity and sustainability, as it can alter soil quality, water availability, and pest infestation. Farmland investors need to monitor and mitigate these risks by diversifying their holdings, insuring their assets, or adopting sustainable practices.
Commodity Dependence
The profitability of farmers, and consequently farmland investors, relies on stable commodity prices. Fluctuations in commodity prices can pose a significant risk to farm profits, making the investment vulnerable to market volatility. Commodity prices are influenced by various factors, such as supply and demand, trade policies, currency exchange rates, and consumer preferences. Farmland investors need to hedge against these risks by diversifying their crops, locking in contracts, or using derivatives.
5 Ways to Invest in Farmland
If you are convinced that farmland is a worthwhile investment, you may wonder how you can get started. Here are five ways to invest in farmland, each with its own pros and cons:
Purchase & Rent Out Land
Perhaps the most straightforward approach to farmland investment involves directly acquiring arable or pasture land and leasing it to a farmer or rancher. This method gives you full control and ownership of the land, as well as a steady income stream from rents. You also benefit from the appreciation of the land value over time, which can be substantial in some regions.
However, this method also requires a substantial upfront investment. In 2018, average prices for cropland stood at $4,130 per acre, and for pastureland $1,390 per acre. Typically, investors lease cropland at $138 per acre and pastureland at $12.50 per acre, resulting in cash yields of 3.3% and 0.9%, respectively.
You also need to deal with the hassle and cost of finding and managing tenants, maintaining and improving the land, paying taxes and insurance, and complying with regulations. You also face the risk of vacancy, default, or damage by tenants, as well as environmental or market risks.
Invest in Farm and/or Farm-Adjacent Stocks
Many farms are publicly traded entities with listed stocks on major exchanges. Investors have the flexibility to choose their preferred type of farm based on ownership structure or the specific crop, livestock, or commodity they specialize in. For instance, Cal-Maine Foods Inc. (NASDAQ: CALM) cultivates eggs for distribution to grocery stores, wholesale clubs, etc.
Opportunities also abound in companies that manufacture farm equipment and supplies. Notable players in the farm equipment industry include Tractor Supply Co. (NASDAQ: TSCO), Deere and Co. (NYSE: DE), and Scott’s Miracle-Gro Co. (NYSE: SMG).
Investing in farm and farm-adjacent stocks is easy and convenient, as you only need a brokerage account and some funds to buy and sell shares. You also benefit from the liquidity, transparency, and regulation of the stock market. You may also receive dividends from some of these stocks, adding to your income.
However, investing in farm and farm-adjacent stocks also exposes you to the market risks and volatility of the stock market. You also have less control and ownership over the actual farmland, as you are investing in the company rather than the land. You also need to do your due diligence and research on the financial performance, competitive advantage, and growth prospects of the companies you invest in.
Find a Farmland REIT
Farmland real estate investment trusts (REITs) offer an accessible and cost-effective entry to investing in farmland. Any investor with a brokerage account and sufficient funds can participate. Remember, due to their stock exchange listing, they are exposed to market risks.
REITs are companies that own, operate, or finance income-generating real estate. They are required to distribute at least 90% of their taxable income to shareholders as dividends, making them attractive for income-seeking investors. REITs also offer diversification, liquidity, and professional management.
Two REITs currently specialize in acquiring farmland and leasing it to farmers: Farmland Partners (FPI) and Gladstone Land Corporation (LAND).
Farmland Partners owns and operates over 160,000 acres of farmland across 16 states, growing over 30 different crops. It leases its land to over 125 tenants under long-term contracts, generating stable rental income. It also aims to increase the value of its land through capital improvements, conservation practices, and acquisitions.
Gladstone Land Corporation owns and operates over 140,000 acres of farmland across 10 states, growing over 45 different crops. It leases its land to over 120 tenants under long-term contracts, generating stable rental income. It also aims to increase the value of its land through organic conversions, irrigation systems, and acquisitions.
Alternatively, Iroquois Valley Farmland REIT is a publicly non-traded REIT. Although open to all investors, it does not trade on a stock exchange. It comes with a higher minimum investment (over $10,000) and investors are restricted from redeeming their shares for five years.
Iroquois Valley Farmland REIT focuses on supporting organic and regenerative farmers by providing them with long-term leases or mortgages. It owns and operates over 16,000 acres of farmland across 15 states, growing over 40 different crops. It also aims to increase the value of its land through soil health, biodiversity, and carbon sequestration.
Agricultural ETFs & Mutual Funds
Instead of purchasing individual stocks in agricultural companies, you can also invest in vehicles like mutual funds or exchange-traded funds (ETFs).
Mutual funds centered on farmland may not exclusively invest in agriculture; they often include adjacent sectors. The Fidelity Agricultural Productivity Fund (FARMX) strives to allocate 80% of its assets to agricultural productivity companies, with its largest holding being Deere.
Agricultural ETFs commonly follow one of two structures: commodities contracts or farming stocks. Farmland ETFs frequently provide dividends, offering investors dual avenues for potential profits.
The Invesco DB Agriculture Fund (NYSE: DBA) stands out as the largest commodities-based farmland ETF and the VanEck Agribusiness ETF (NYSE: MOO) is the most significant ETF focused on farm and farm equipment stocks.
Investing in agricultural ETFs and mutual funds is convenient and affordable, as you can access a diversified basket of farmland-related assets with a low minimum investment. You also benefit from the liquidity, transparency, and regulation of the stock market. You may also receive dividends from some of these funds, adding to your income.
However, investing in agricultural ETFs and mutual funds also exposes you to the market risks and volatility of the stock market. You also have less control and ownership over the actual farmland, as you are investing in the fund rather than the land. You also need to pay attention to the fees, expenses, and taxes associated with these funds, as they can reduce your net returns.
Use a Farmland Crowdfunding Platform
Various companies facilitate online access to fractional farmland investing. The majority of these crowdfunding platforms for farmland are restricted to accredited investors — individuals with a net worth exceeding $1 million (excluding primary residence equity) or an income of $200,000 in each of the last two years ($300,000 if married).
Popular crowdfunding platforms include: AcreTrader, FarmFundr, FarmTogether, Farmland LP, Harvest Returns, and Steward.
These platforms allow you to invest in specific farmland properties or portfolios, with varying minimum investments, returns, and fees. You can browse and select the farms that match your criteria, such as location, crop, lease type, or valuation. You can also monitor and track the performance of your investments through the platform’s dashboard.
Investing in farmland through crowdfunding platforms is simple and accessible, as you can own a share of farmland with a relatively low investment. You also benefit from the professional management and expertise of the platform, as well as the diversification and income potential of the farmland. You may also receive tax benefits from investing in farmland through these platforms.
However, investing in farmland through crowdfunding platforms also comes with some drawbacks, such as illiquidity, fees, and risks. You may not be able to sell or redeem your shares easily, as there is no secondary market for these investments. You may also have to pay fees and commissions to the platform, which can vary depending on the deal structure and terms. You also face the risk of losing your investment if the platform or the farm fails or underperforms.
Best Locations for Investing in Farms (U.S.)
Historical trends can provide insights into regions exhibiting strong performance.
The USDA Land Values 2022 Summary highlights states with significant growth in farmland real estate. Noteworthy examples include Kansas leading with 25.2% year-over-year growth, followed by Iowa at 21.4%, Nebraska at 21%, South Dakota at 18.7%, and Minnesota at 17.4%.
In terms of multi state regions, the Northern Plains led with a cumulative growth of 19.8%, followed by the Corn Belt with a 14.9% increase.
It’s crucial to note that while these statistics indicate recent profitability, past performance doesn’t guarantee future results. Additionally, factors like crop yields per acre and productivity should be considered when evaluating farmland investments.
By tactically investing based on where the best-performing farmland assets are, you can enhance your risk-reward profile and increase overall returns when investing in farms.
Ready to Invest in Farmland? Prepare Your Portfolio with Kubera
Investing in farms can be a rewarding and profitable venture, but it also requires careful planning and preparation. Before you dive into the world of farmland investment, you need to have a clear picture of your financial situation, goals, and investment strategy.
One of the best ways to do that is to use a powerful and reliable balance sheet software that can help you track and manage all your assets, liabilities, and net worth. That’s where Kubera comes in.
Kubera is a comprehensive balance sheet software that empowers you to efficiently manage and optimize all your assets, from traditional stocks and bonds to alternative assets such as cryptocurrency, real estate, farmland, websites, collectibles, private market investments, and more.
With Kubera, you can easily monitor your assets, debts and growth across all your accounts and assets. You can also model your cash flow, income, expenses, and rebalance your portfolio using the tools that can help you optimize your portfolio performance, diversification, and risk management.
Kubera is the ultimate wealth management solution equipped with all essential features high net worth individuals (HNWIs) need to build, track, and grow lucrative, diverse portfolios, including investments in farms and other alternative assets. Whether you are a beginner or an expert, Kubera can help you achieve your farmland investment goals with ease and confidence.
Conclusion
Investing in farms is a smart and strategic way to diversify your portfolio, hedge against inflation, and generate steady returns. Farmland is a scarce and valuable resource that can withstand economic and environmental shocks and provide long-term growth. Farmland investment also offers various benefits, such as tax breaks, potential dividends, and social impact.
However, investing in farms also comes with some challenges and risks, such as high costs, weather dependence, and commodity volatility. You need to do your research, due diligence, and risk assessment before investing in farmland.
Fortunately, there are many ways to invest in farmland, such as purchasing and renting out land, investing in farm and farm-adjacent stocks, finding a farmland REIT, investing in agricultural ETFs and mutual funds, or using a farmland crowdfunding platform. Each option has its own pros and cons, and you need to choose the one that suits your budget, goals, and preferences.
To prepare your portfolio for investing in farms, you need a reliable and powerful balance sheet software that can help you track and manage all your assets, liabilities, and net worth. Kubera is the ultimate wealth management solution for individuals who want to invest in farms and other alternative assets. Kubera can help you monitor, optimize, and protect your wealth with ease and confidence.
If you are ready to invest in farms and start harvesting profits, sign up for a trial of Kubera today and see how it can help you achieve your financial goals.
