When looking at non-traditional asset classes, real estate often ranks high. Most people picture apartment buildings, business complexes, and storage facilities when they think of real estate.
How about cropland, though? It makes sense for the world’s wealthy to diversify their holdings with agricultural property. Profits from cultivating fertile land typically outstrip those of other investments, while also being less volatile.
Like any other type of investment, this one is not without its share of potential pitfalls. Farming is difficult in general, but especially so when adverse weather conditions reduce yields, input costs skyrocket, and you’re doing it all by yourself. Is farming a decent investment therefore, when everything is taken into account?
Is Purchasing Farmland a Sound Investment?
Without a doubt, farmland is a promising asset for the proper investor. The trick is to do your homework and make sure you’re getting a good price. Agricultural land is a sound financial commitment for a number of reasons:
- Return of Farmland
A solid investment is one that produces satisfactory returns, regardless of the asset class. Obviously, you aren’t buying stocks just to have them; rather, you’re trying to secure your financial future, amass wealth, or provide a happy retirement for yourself. Your investments, not your life, should be your primary focus when thinking about financial security.
How competitive is farming, exactly?
AcreTrader reports that, over the previous 20 years, farmland has produced an average yearly return of 12.24%, which may come as a surprise. That is outstanding by any standard. Take a look at some of the typical yearly returns of more conventional investments:
- Stocks. The S&P 500, the leading U.S. stock market index, has earned yearly returns of around 10.5% over the previous several decades.
- Gold. Gold, one of the world’s most coveted safe-haven assets, yields average yearly returns of around 10.61%, according to Statista.
- Silver. According to statistics from Macrotrends, silver had annualized returns of around 10.33% from 2009 through 2020, despite significant volatility over this period.
Bonds and other forms of fixed income are also infamous for their dismal returns. When compared to the long-term return rates of other investment vehicles, the over 12% average annual return obtained by agricultural investors over the past few decades stands out as particularly exceptional.
- Land prices are expected to rise further.
Just what is it about land that makes it such a desirable investment? Scarcity.
The amount of land available for purchase throughout the world, despite appearances to the contrary, is really decreasing. As the world’s population rises, so does the need for food, fuel, and agricultural and residential land.
It goes without saying that we can’t make more Earth; our world can only hold so much. The law of supply and demand dictates that, due to a limited supply and rising demand, land prices will inevitably grow over time, driving up the cost of agricultural property.
There is a limited amount of land available. The Earth is a rather sizable planet, but it isn’t getting any bigger.
New housing units will be required, and food production will increase, as the world’s population rises. If this pattern persists, land values will continue to rise, driving up prices substantially.
- Farmland generates passive income.
Investing in farms may be lucrative in ways other than price appreciation. Farms are year-round businesses that consistently turn a profit. If you possess a plot of farmland, you can produce crops on it and make a respectable profit.
Of course, keeping a farm going costs money and takes up a lot of time, but as we’ll see, there are a lot of options for investing in agriculture. Unless you own the actual farmland and start tending to it yourself, someone else manages the day-to-day farming activities.
Investing in property that is ideal for high-value crops requires research, but the payoff is substantial: you may live off the rent or lease income for years to come. However, a farm’s passive revenue is affected by a few factors:
- The market value of various crops varies greatly. It’s important to keep a careful eye on the yield of the farms you’re considering buying into. If you had to choose between 1,000 pounds of pistachios and 1,000 pounds of maize, the pistachios would be the clear winner.
- The time it takes for various crops to mature varies. Pistachios are more expensive than maize per pound, but corn reaches maturity much sooner. Rapidly maturing crops are beneficial for the agricultural investor seeking rapid returns.
- Factors in the Natural World. Finally, whether you own the whole farm or only a portion of it, environmental considerations will affect your operational expenses. For instance, it would be cheaper to irrigate a farm located in an area with plentiful rainfall than one situated in a region with little precipitation. Extreme weather, such as high temperatures, or fluctuations in rainfall, can have a significant effect on a farm’s harvest.
- Food Demand Indicates a Promising Long-Term Investment
Owning farmland, even partially, may be so rewarding that its owners may never want to part with their investment. There are two main drivers behind the dramatic increase in food consumption.
To begin, the rate at which the world’s population is expanding is rapidly increasing. This pattern should keep on for some time. After all, more marriages and families in 20 years equals more infants born now. Adding another 2.3 billion people to the world’s population by 2050 will result in a 70% increase in food demand, as reported by SeafoodSource.
Since the demand for farmland’s crops is expected to rise over the next several decades, the average acre’s worth of revenue should increase significantly. That’s why many people believe that farmland isn’t simply a good long-term investment because of its price appreciation, but also because of the advantages that come from helping to feed the world.
How to Make a Farmland Investment
Several options for investing in farms have already been discussed. Among the most frequent are:
Purchase Farmland Directly
Buying farmland altogether is the most direct route to a profitable investment. Your quest to acquire farmland will lead you to real estate websites like Zillow and Realtor.com. You’ll also discover how constrained your choices are.
The United States Sustainability Alliance estimates that households control around 86% of the farmland in the United States. Institutional investors and wealthy individuals own a large portion of the remaining farmland. Even Bill Gates owns farmland, with his 242,000 acres spread over 19 states.
Because of this, the number of farmland parcels up for grabs is rapidly dwindling, with the great majority already in the hands of a holder who has no plans to part with it. But if you look about, you can locate a property that’s worth your time.
Invest in Agriculture ETFs
Putting money into agriculture-focused exchange-traded funds (ETFs) is one of the easiest and most prevalent methods to gain access to agricultural investing. Exchange-traded funds (ETFs) are a common investment option because they use the combined capital of many participants to make purchases of underlying assets in accordance with the fund’s prospectus.
Commodity futures and equities of farming firms are the primary holdings of farming exchange traded funds. One of the most well-known is the Invesco DB Agriculture Fund (DBA), which speculates on the prices of many agricultural commodities including cotton and soybeans.
Purchase Farming REITs
Investing in farming-focused real estate investment trusts is another approach to make farm investments (REITs). REITs, like ETFs, are vehicles that combine investment monies from a big group of investors. Farmland-focused REITs, on the other hand, employ those investment money to acquire and preserve farmlands on behalf of shareholders.
By investing in these firms, you are assisting giant organizations who have farming down to a science. Gladstone Land, for example, is one of the largest farming REITs (LAND). The firm holds property in 14 different states and actively generates income for its investors through farming operations.
Participate in the Crowd
Many agricultural businesses have turned to crowdfunding campaigns to help them get off the ground. Several platforms exist specifically to facilitate the introduction of individual investors to farmers seeking capital. Crowdfunding for real estate has made it simple for regular people to put money into agricultural properties.
Most of the time, when people take advantage of these kinds of investment possibilities, they are given some form of partial ownership in the farms they help. So, the investors will get paid back after the farmer starts making money off of the crops.
Where Should You Invest in Farmland?
In terms of agricultural investments, one of the largest challenges is determining where exactly to make such investments. Fortunately, you can pick from a number of different possibilities nowadays.
Listings of Real Estate
If you want to acquire actual property and run a farm on your own, you should check out real estate listing websites like Zillow, Realestate.com, and LandWatch.com. The primary function of these sites is the sale of real estate, and many of them have filtering options that let you look at ads for vacant land instead of houses.
Make sure the land you want to buy is designated for agricultural use before you make the investment.
Platforms for Crowdfunding
Buying land without a middleman has a few significant difficulties. Farming is hard labor and will demand a sizable upfront investment. Because of this, many investors like using crowdfunding sites to acquire land.
If you buy land in this method, you won’t have to worry about running the farms. Instead, they fall within the purview of the farmer who is offering the property for sale. In addition, investing in farms through crowdfunding platforms requires less initial capital. Minimum investments on most platforms are between $10,000 and $15,000, but that’s still far cheaper than buying a farm and the necessary machinery.
Agricultural crowdfunding platforms’ primary function is to bring together people who own or are interested in purchasing farms for the purpose of building mutually beneficial long-term relationships. AcreTrader, FarmTogether, and FarmFundr are three of the most well-known sites of their kind.
However, most crowdfunding sites for farms only allow investments from certified investors, who must have a high income or a high net worth. It might be challenging to identify investment alternatives that allow those with relatively limited financial resources to purchase agricultural shares.
Purchase Farming Stocks, ETFs, and REITs
Most investors would be best served by purchasing agricultural equities, exchange traded funds, or real estate investment trusts rather than individual farms. These investments are available to everyone who can afford to pay the price of one share (of a firm, fund, or trust), which is usually less than $100.
Among the many brokers available, some of the most well-known are Charles Schwab, E*Trade, and TD Ameritrade.
Rather than buying individual farms, most investors would be better served by acquiring agricultural shares, exchange traded funds, or real estate investment trusts. Anyone with enough cash to buy one share (of a company, fund, or trust) can participate in these investments.
A few of the more well-known brokers include Charles Schwab, E*Trade, and TD Ameritrade, but there are many others to choose from.