Apr 5, 2021

Investing in Farmland (Risks, Returns, Process)

Investing in farmland has traditionally been difficult. Most farms remain generationally owned, with the remaining investment opportunities held by institutional investors. 

Fortunately, that’s changing and many more investors can now capitalize on farmland investments and benefit from the passive income they can generate.

Today, it’s easier to invest in farmland than ever before, with it providing investors with returns of up to 13% per annum.

In this article, we’ll go over why you should invest in it, the risks of doing so, and the best way to invest in farmland.

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This Article Contains: 

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5 reasons to invest in farmland

How to invest in farmland

4 risks of investing in farmland

4 things to bear in mind when investing in farmland

A better way of investing in farmland: FarmTogether 

Let’s get started. 

5 Reasons To Invest In Farmland

There are several compelling reasons to make an agricultural investment:

A. A good history of producing long-term returns 

As with most types of real estate, a farmland investor can benefit from a farm’s value appreciation over time.  

Farmland value has been steadily rising for decades, driven largely by increasing demand for agricultural products. The Federal Reserve Bank of Chicago states that American farmland has appreciated an average of 6.4% every year from 1965 to 2019.

Additionally, farm land can generate income from several unique sources. Aside from the crop yield revenue, farmland investments can earn additional income through other avenues of revenue such as renewable energy projects and hunting leases. 

B. A hedge against inflation

Inflation hedging refers to a type of investment that minimizes the inflationary effect on your money. In other words, these investments shield you from the decreasing purchasing power of money due to inflation with time.

Gold has historically been the asset class of choice because its value has steadily appreciated over time. However, farmland can also be an effective asset class for inflation hedging. 

With the world’s population continuing to grow, food prices increase in tandem with inflation. As a result, the value of the land that produces the food will also appreciate.

C. Low correlation to the stock market

When investing, it’s important to ensure you aren’t holding a portfolio of only assets correlated to the stock market. This can result in you being adversely affected by specific market trends. 

To minimize this risk, you should hold some assets that share a low correlation with the stock market. Fortunately, farmland isn’t highly correlated with the stock market, producing returns even in periods of market instability.

D. Historically low volatility 

Assets like stocks and bonds are highly volatile, with their values changing in response to various conditions.

However, conditions that would disrupt many other asset classes seem to have a minimal effect on farmland. Given the increasing global population and the limited amount of agricultural space, land value has rarely decreased, making a land investment one of the more stable opportunities.

E. Tax benefits 

The United States has been a significant proponent of agriculture as a means of economic stimulation. As a result, all 50 US states have developed favorable property tax rates for agricultural land.

How To Invest In Farmland

There are several ways to invest in farmland depending on your available capital, investment requirements, and financial goals. 

Some of these methods include: 

A. Buying land directly 

A direct investment like this is one of the more straightforward ways to invest in a farm. Complete farmland ownership offers you the most control and highest potential for returns but comes with it’s fair share of drawbacks. 

Pros

  • Having direct ownership of the land gives you the freedom over the revenue generation streams from that land.
  • There are unique tax advantages available to those who own agricultural land.
  • As you own the land, there is the potential for greater farmland return as you have control over what you produce, who you can lease the land to, etc.

Cons

  • Becoming a farmland owner requires a significant capital investment and often involves additional costs for upkeep.
  • Owning and maintaining a farm requires extensive agricultural knowledge.
  • Owning farmland is highly illiquid.

B. Purchase publicly traded agricultural stocks

Instead of buying farmland, you can buy agricultural stocks instead.

These can range from business involved in directly growing and producing crops to companies in various sectors that support farmers such as: 

  • Deere & Company (DE) manufactures and sells a variety of agricultural equipment.
  • Bunge Limited (BG), a global agribusiness that transports agricultural commodities.
  • AquaBounty Technologies (AQB), a biotechnology company that researches and develops products to enhance agricultural productivity.
  • The Mosaic Company (MOS) is a manufacturer and distributor of crop nutrient products.

Pros

  • Compared to other forms of farmland investing, this is one of the most easily accessible ways to invest.
  • High liquidity as you can cash out whenever you like.

Cons

  • It can be challenging to find the right stocks that will provide a meaningful return without spending a ton of time performing your due diligence on them.
  • You have no control over what the land produces and how quickly they adapt to changes, which may reduce potential returns.

C. Farming REITs

A REIT (real estate investment trust) is an excellent option for owning a stake in a farm. Typically, REITs pool investments from several investors to purchase farmland before leasing it to farmers. 

Pros

  • Investing in a REIT is far more accessible and affordable than investing in farmland directly.
  • Diversification is much easier as you can invest in multiple farms across the country.
  • Depending on the type of farmland REIT, it could offer moderate liquidity.

Cons

  • Investing in REITs can involve complicated tax implications.
  • Investors pay higher taxes on REIT dividends than some other asset classes.
  • Limited control over what the farm produces.

D. Crowdfunding platforms

Like REITs, agricultural crowdfunding platforms let you directly invest in shares of profitable farmland.

Pros

  • Investing in crowdfunding platforms offers greater levels of stability than REITs as they aren’t traded.
  • Investors are typically paid in regular intervals, creating a more predictable cash flow.
  • No need for extensive previous knowledge of the farmland industry.
  • You may be able to choose from a selection of investment opportunities, helping you have more control over where your investment is going.

Cons

  • As an investor, you have limited control over what the farm produces.
  • Some crowdfunding platforms require you to lock in your funds, reducing liquidity.

4 Risks of investing in farmland

While farmland investing can be an attractive investment, it’s not without its risks. 

Some of these risks include: 

  • Lack of liquidity. Typically, farmland investments are largely illiquid, making it hard to cash out.
  • It requires extensive knowledge. Farmland investments are quite different from traditional asset classes. As such, you need a lot of specialized knowledge to ensure that you’re making a good investment.
  • Risk of damage and destruction. Since farmland is a tangible and real asset, there’s a risk of mismanagement, fire, and pests damaging the land and reducing its value.
  • Weather conditions. Farmland is susceptible to unpredictable weather conditions, such as flooding or extended periods of drought brought about by climate change, which can cause it to depreciate.

Fortunately, there’s an easy way to mitigate most of these risks. 

Modern farmland investing platforms such as FarmTogether let you invest in thoroughly vetted farms that are well-taken care of and offer you a level of liquidity that you couldn’t access earlier.

4 Things to keep in mind when investing in farmland

Before committing to a farmland investment, keep these points in mind.

1. Farmland is a long-term investment

Farmland can be classified as a type of real estate investment. As such, before investing, it's essential to understand you won't be seeing returns immediately. You should be willing to wait up to seven years before the land starts generating a return, depending on what's being grown.

Additionally, there can be short-term fluctuations in the prices of commodities, which may impact your returns.

2. Decide on the type of farm

You need to decide on the type of farm to invest in, such as an organic or conventional farm. Organic farmland is a fast-growing sector that makes for a good investment, but not all geographic regions and soil types are suitable for it. 

3. Diversify 

To mitigate your risk against specific farming conditions, try and spread your farmland investments across several different crop types, such as permanent crops and row crops. 

Picking different locations will also serve as a hedge against many seasonal and market-specific risk factors, strengthening your investment portfolio. 

4. Consider soil quality and water availability

You need to ensure the farm has arable land for efficient crop production. Soil fertility and water availability are crucial factors to keep in mind here. Soil classifications range from class 1, 2, or 3, with class 1 being the highest quality.

It's important to consider investing in land that has been properly cared for in the past to ensure that the soil and water tables are healthy. 

A Better Way Of Investing In Farmland: FarmTogether 

FarmTogether is an easy way to take advantage of the numerous benefits of farmland investments with none of the hassles.

The platform provides accredited investors with access to institutional-grade farmland. 

FarmTogether sources and inspects all the opportunities before offering co-ownership to investors. Once you’ve invested, you earn regular dividends paid out quarterly or annually, depending on how much cash the farm has generated for the year.

Additionally, once the properties are sold after five years, you receive a share of the profits in proportion to the size of your initial investment.

There's a minimum investment of $10,000 and the platform targets annual returns ranging between 8% and 13%. Fees are dependent upon your investment, but generally, they charge a 1% acquisition fee and a 1% annual management fee.

 

Final Thoughts

While investing in farmland isn’t without its risks, its stability and long-term earning potential make it a great investment opportunity.
If you’re looking to discover more alternative investment opportunities, consider taking the MoneyMade Investor Quiz. After answering a few simple questions, MoneyMade will present you with a list of investment opportunities that suit your specific needs.

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