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Farmland might not be your first thought for an investment, but as inflation sticks around and market uncertainty persists, parking your money in farmland and agriculture could provide the diversity and stability you seek for your investment portfolio.
Looking for an alternative investment not correlated to stocks and bonds? Consider these key tips on how to invest in farmland.
Why Invest in Farmland?
Farms are essential. You likely don’t think about them often, but chances are you eat food every day that you had little, if anything, to do with producing. As the demand for more food increases, the acres of farmland that put the products in your refrigerator and on your table dwindle.
By investing in land, you can counter this issue of supply and demand, which can potentially deliver income from products and rent, as well as gains from appreciation. A farmland investment can also hedge against inflation, as the prices of farm products tend to rise with inflation.
Investing in farmland is a long-term strategy that could provide heightened returns. The average annual rate of return has historically been about 2.5%. However, over the last 20 years, farmland has produced an average return of 12.75%. Additionally, if you buy farmland, you can expect low price volatility, making it easier to predict the price you may get out at the end.
Working sun up to sun down and feeling the grit of dirt beneath your fingernails may not be for you. But there are many ways to invest in farmland and agriculture, such as farmland assets, farm equipment companies, commodities through futures contracts, agricultural ETFs and crowdfunding platforms.
Ways to Invest in Farmland
Dating back to 11,000 B.C., farming is considered the world’s oldest industry and isn’t going away anytime soon. If you’re considering taking part in this vital industry, here’s what you need to know about investing in farmland for the long term.
Direct Investments
If you are interested in the industry, you may wonder how to invest in farmland directly. One way to do so is to buy a farm outright. While you don’t have to work it, as you can lease it to a farmer or partner with one, buying a farm does require substantial capital.
The average farm in the U.S. is 464 acres, with an average value of $4,170 per acre. That means an average total price tag of $1.93 million. You might be able to find a bargain in a competitive bid process at a land auction, though.
To own a farm, you must also consider the regulatory costs. The United States Department of Agriculture (USDA) and the Environmental Protection Agency (EPA) are the two main regulators, but there are also state and local agencies. Together, these agencies oversee land use, water management, animal welfare, labor issues, use of pesticides and environmental protection.
Farmland REITs
You typically think of real estate investment trusts (REITs) owning and operating commercial and residential properties. However, some are involved with farmland. There are two types: debt and equity. A farmland REIT loans money (debt) to farmers to buy more property and improve operations. Alternatively, the REIT can buy and rent farmland (equity) to farmers.
These investments can support various crop production, including row, permanent and commodity crops. They also may support water rights. As an investor, you can gain access to owning farmland without putting in the work required on a farm and receive a dividend.
Agriculture Stocks
Many of the companies that line the shelves of your local grocery store with fruits and vegetables, dairy products, poultry and meats are publicly traded. You can buy agriculture stocks that produce crops or raise livestock, manufacture agricultural equipment or create fertilizer for crop production.
Agriculture ETFs
There are two main ways to invest in agriculture exchange-traded funds (ETFs): commodities-based farmland ETFs and those holding farm or farm equipment stocks. You’ll have to open a brokerage account and deposit sufficient funds to buy shares of these farmland ETFs. But you also might benefit from the price increases of the commodities or stocks, as well as from dividends that some ETFs pay.
Agriculture Mutual Funds
As with agricultural ETFs, agriculture mutual funds pool money from many people to invest in the farming and agriculture industries. Effectively, they are commodity mutual funds, investing in a range of agricultural products. These funds can also take part in other industries, such as natural gas, oil, or precious metals like gold and silver.
Crowdfunding Platforms
You can own a stake in a farm or farmland through online crowdfunding platforms without physically owning or working the land. Crowdfunding sites pool money from investors to purchase real estate or fund projects, often with an investment as small as a few hundred dollars. The platforms manage the farms and distribute potential profits to investors.
Many platforms require you to be an accredited investor, which means that you must have a net worth of $1 million or earn $200,000 per year during the previous two years. But some platforms also allow non-accredited investors.
Pros and Cons of Investing in Farmland
Farming in farmland may seem novel, but like any other investment, farming has advantages and disadvantages. Before you make a decision, consider these potential pros and cons of investing in farmland.
Pros
- Is generally resilient to inflation
- Correlates minimally to traditional assets
- Offers the potential to benefit from long-term trends
Cons
- Illiquid real estate that’s often challenging to sell
- Environmental risks that can wreak havoc on overall returns
- Regulatory exposure that could add unexpected costs
Is Investing in Farming in Your Future?
Farmland has likely never appeared on your list of possible investments. But with its correlation with rising consumer prices, farmland can offer you a hedge against inflation. Investing in farmland also provides the potential for high returns, as farmland historically has seen low price volatility, and the supply-and-demand equation may work in your favor for the foreseeable future.
Whether you consider how to invest in farmland through direct investment, farmland REITs, or agriculture stocks, this essential industry can provide you with unique opportunities to diversify your portfolio.
Frequently Asked Questions
Is it worth investing in farmland?
Typically, farmland is a buy-and-hold investment. It’s a long-term investment that can produce income from rent and capital gains from asset appreciation.
Is there an ETF that invests in farmland?
So far, you won’t find specific ETFs investing in farmland. However, some ETFs hold positions in farming companies, other agricultural stocks and commodities futures.
Where is the best farmland?
The answer depends on various factors, as the best farmland has good soil, water, infrastructure and market access. Think the Midwest, the Black Belt (Alabama, Mississippi and Georgia) and California, but remember that Texas boasts the most farmland in the U.S., and financially high-performing farms in the Southeast prosper from livestock, not crops.
