Land is one of the oldest investments available. The proponents of investing in farmland think that it is an excellent long-term investment while providing a safe haven for your money during economic downturns.
With a growing global population and shrinking U.S. farmland acreage, it is said that the laws of supply and demand will drive up farmland prices.
An impressive statistic is that farmland returns have been positive every single year since 1990 (the first year of the farmland index).
All of this sounds really good, but should you be buying farmland as an investment? Are there any catches? Let’s find out.
Buying Farmland as an Investment
Farmland value is driven by both the value of the land itself, and the income that is earned on the land. The income that is earned is heavily influenced by commodity prices as well as interest rates. Rising commodity prices means that farms sell their goods for more money. If interest rates are lower then farms are saving money on the debt servicing, which results in more profit.
As mentioned, farmland returns have been positive every single year since 1990, and the volatility of the prices are low. However, there are several reasons for this.
1990 was basically the bottom for American farmland prices. In the 1980’s, farmland prices kept dropping and dropping before finally hitting the bottom near the end of the decade. In 1980, the average value for an acre of farmland was $1,800.
By 1990, it had fallen to about $1,200 per acre before starting a recovery. By 2003, the value had gone up to around $2,200 per acre. By 2014, the value had gone up to $4,000 per acre.
1990 was a great time to start a farmland index! If we look at longer periods of time (e.g. 1980-2020), then farmland hasn’t really done that well.
The reason for the low volatility of farmland is that it is valued on an appraisal basis, which is very different from something like gold which is literally priced by the market minute-by-minute. While a comparison between the volatility of farmland and gold is unfair, it doesn’t change the fact that farmland does have lower volatility – which is a good thing for capital preservation.
Despite some shortcomings, farmland can still be a very good investment today if you can find the right deal.
How to Invest in Farmland
How does one actually go about getting exposure to farmland? Here are the most popular methods.
Buying land and leasing it to farmers. This will involve quite a bit of work on your part, but you will directly own the land. You will make some money with the lease, but the real value is in the land appreciation over time.
Farmland REIT’s. There are some large REIT’s set up in the farmland space. The most prominent ones are Gladstone (symbol: LAND) and Farmland Partners (FPI). These investments can be held in most brokerage accounts.
Crowdfunding farmland investing. AcreTrader and FarmTogether are two of the most popular crowdfunded farmland investing platforms. You can visit their websites for open offerings on farmland. Typical minimum investment requirements are in the $10,000 to $30,000 range.
We tend to lean towards the farmland REIT’s as they provide excellent liquidity, and are easy to access. You may also be able to hold them in tax-sheltered investment accounts.
Risks with Farmland Investing
As with any investment, there are risks. Let’s examine the most prominent ones in the area of farmland investing.
Some people say that farmland in the US is decreasing, and this will cause a supply shortage which will in turn drive up prices. However, this isn’t actually the case as productivity gains such as better fertilizer, automated tractors, and other technologies have drastically increased farmland output. This is the main reason that we don’t need as much farmland now.
The price of the agriculture commodity will also be highly correlated with returns. For example, pistachios might be selling for a very high price but soybean prices might be down. If you have farmland that is a heavy producer of soybeans then you might be getting terrible returns.
The weather can also have a devastating effect on farmland returns. A big fire can burn large areas of farmland down. Cloudy weather will decrease crop yields. A lack of rain might cause entire crops to die if there isn’t enough water for irrigation.
Despite these risks, we think that there is room for farmland investing in a well-diversified portfolio.
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