According to the U.S. Department of Agriculture (USDA), there are approximately 911 million acres of farmland in America. Of this, farmers and ranchers own about 61% of the land they use, while the rest is rented from third-party landlords. Investment groups, including retired farmers, hold the remaining 31% of America's farmland. Non-operating individuals or partnerships own 21%, and corporations, trusts, or other owners hold 10%.
Despite being one of the oldest investment classes, land as an investment is often overlooked and considered boring. However, in a world filled with unpredictability, sometimes the allure of the "boring" becomes quite appealing. In this resource, we will explore why investors and individuals are increasingly choosing to invest in farmland.
What are the Benefits of Investing in Farmland?
Farmland investments come with numerous advantages that make them attractive to agricultural investors and landowners alike.
1. Long-Term Stability
One of the most significant benefits of investing in farmland is its long-term stability. Unlike stocks and bonds, which can be volatile, farmland tends to appreciate steadily over time. This stability provides a reliable source of returns, making it an excellent addition to any investment portfolio.
Farmland is known for its relative stability compared to other investment asset classes. There have been instances where the volatility of the S&P 500 has been more than double that of farmland. Surprisingly, farmland has even exhibited lower volatility than commercial real estate, bonds, and gold.
Farmland investments provide diversification for portfolios. Agriculture as an industry is not closely correlated with stock prices, meaning that it can help balance a portfolio and reduce overall risk.
2. Inflation Hedge
Farmland also acts as an effective hedge against inflation. As the demand for food and other agricultural products increases, the value of farmland rises correspondingly. This natural correlation helps protect your investment from the eroding effects of inflation.
Investing in farmland serves as a valuable safeguard against inflation. This is due to several reasons.
As inflation rises, so do the prices of commodities such as wheat and corn. Consequently, the increase in crop prices can lead to higher returns on farmland investments. Moreover, the low correlation between farmland and the stock market, coupled with its tendency to appreciate, further solidifies its position as a natural hedge against inflation.
3. Passive Income
Investing in farmland offers the potential for passive income through lease agreements with farmers. By leasing out your land, you can earn a steady stream of income without having to manage the farming operations yourself. This makes it an attractive option for those seeking a hands-off investment.
Farmland owners can also earn income from crop yields or cash rental payments when they lease their land to other farmers. According to the National Agricultural Statistics Service (NASS), the average rent rate for cropland is also steadily rising and has increased by an average of $7 per acre.
What are the Risks Associated with Investing in Farmland?
While there are many benefits, it's essential to be aware of the potential risks involved in farmland investment.
1. Market Fluctuations
Commodity prices can be volatile, and they are heavily influenced by global market conditions. For instance, trade agreements or disruptions in supply chains can greatly impact the demand for crops and, in turn, their prices.
Like any investment, the value of farmland can fluctuate due to market conditions. Factors such as commodity prices, changes in agricultural policies, and economic downturns can impact the value of your investment. Understanding these risks and staying informed about market trends is crucial for mitigating potential losses.
2. Environmental Factors
Environmental factors, such as droughts, floods, and pests, can negatively affect crop yields and, consequently, the value of your farmland. Investing in farmland requires a thorough understanding of the local climate and soil conditions to minimize these risks.
Farming is heavily reliant on weather conditions, and natural disasters such as floods, droughts, or wildfires can have a significant impact on crop yields. These unpredictable events can also damage the land itself, leading to potential losses.
3. Management Challenges
Managing farmland can be complex, especially for those inexperienced in agriculture. From maintaining soil health to dealing with legal and regulatory issues, owning farmland comes with its share of responsibilities. Consider hiring a professional farm manager or partnering with an experienced farmer to help manage these challenges.
Why Invest in Farmland?
Investing in farmland offers unique opportunities that set it apart from other types of investments.
1. Growing Demand for Food
The global population is expected to reach 9.7 billion by 2050, driving an increased demand for food. This growing demand ensures that farmland will continue to be a valuable asset, providing a steady and reliable source of income for investors.
2. Diversification
Farmland investments offer diversification benefits that can help reduce the overall risk of your investment portfolio. By adding farmland to your portfolio, you can spread your risk across different asset classes, reducing the impact of market fluctuations.
3. Social and Environmental Impact
Investing in farmland allows you to contribute to sustainable agriculture and support local communities. By adopting environmentally friendly farming practices and supporting local farmers, you can create a positive social and environmental impact while generating returns on your investment.
How Can I Invest in Farmland?
When it comes to investing in farmland, there are direct and indirect options available. Direct investment involves purchasing and owning the land directly, allowing you to have full control and potentially generate income through farming or leasing.
On the other hand, indirect investment allows you to invest in farmland through various financial instruments such as real estate investment trusts (REITs) or agricultural funds, providing an opportunity to diversify your portfolio and benefit from the potential appreciation of farmland values. There are several ways to invest in farmland, each with its own set of advantages and considerations.
1. Direct Ownership
Purchasing farmland directly is the most straightforward way to invest. This approach gives you full control over the property and allows you to benefit directly from any appreciation in land value. However, it also comes with the responsibility of managing the land and dealing with any associated challenges.
2. Farmland REITs
Real Estate Investment Trusts (REITs) specializing in farmland offer an alternative way to invest without the need for direct ownership. Farmland REITs pool funds from multiple investors to purchase and manage agricultural properties, providing a more hands-off investment option. This approach allows you to diversify your investment across multiple properties and benefit from professional management.
3. Farmland Crowdfunding
Crowdfunding platforms enable individuals to invest in farmland with lower capital requirements. By pooling funds with other investors, you can gain exposure to farmland investments without the need for large upfront investments. This approach offers an accessible entry point for those new to farmland investing.
What Kind of Farmland Should I Acquire?
Choosing the right type of farmland is crucial for maximizing returns on your investment.
1. Row Crop Farmland
Row crop farmland is used for growing crops like corn, soybeans, wheat, and cotton. This type of farmland is typically found in regions with fertile soil and favorable climate conditions. Investing in row crop farmland can provide stable returns, especially in areas with high agricultural productivity.
2. Permanent Crop Farmland
Permanent crop farmland is used for growing crops such as fruit trees, nut trees, and vineyards. These crops require longer-term investments but can offer higher returns due to their specialty nature. Permanent crop farmland is best suited for investors willing to commit to long-term investments.
3. Pastureland
Pastureland is used for grazing livestock, such as cattle, sheep, and goats. This type of farmland can provide a steady income stream through livestock sales and leasing agreements. Pastureland is ideal for investors interested in animal husbandry and sustainable farming practices.
How Do I Obtain Property Rights For My Farmland?
Securing property rights for your farmland is a critical step in the investment process.
1. Conduct Due Diligence
Before purchasing farmland, conduct thorough due diligence to ensure that the property has a clear title and is free from any legal disputes. This process may involve reviewing property records, conducting land surveys, and consulting with legal professionals.
2. Understand Zoning Regulations
Familiarize yourself with local zoning regulations to ensure the farmland can be used for your intended purposes. Zoning laws can affect land use, building limitations, and environmental protections, so it's essential to understand these regulations before purchasing.
3. Negotiate Purchase Agreements
Work with a real estate agent or attorney to negotiate favorable purchase agreements that protect your interests. This includes outlining payment terms, contingencies, and any conditions that must be met before the sale is finalized.
What Are Environmental Concerns I Should Know About?
Understanding environmental concerns is crucial for responsible farmland investment.
1. Soil Health
Maintaining soil health is essential for sustainable agriculture. Practices such as crop rotation, cover cropping, and reduced tillage can help preserve soil fertility and prevent erosion. Investing in farmland with healthy soil can ensure long-term productivity and returns.
LandGate's free property report shares valuable soil insights for parcels across the United States. You will be able to view the soil quality categorized by soil class type with class 1 being great soil quality for agriculture to class 8 being very poor for agriculture. We also provide prime farmland classification for the property. If you are interested in viewing this data country-wide, with a LandApp subscription you gain access to data layers that show the soil quality for all properties.
2. Water Management
Water availability and management are critical factors in farmland investment. Ensure the property has access to reliable water sources and consider implementing efficient irrigation systems to conserve water. Sustainable water management practices can enhance crop yields and protect the environment.
3. Biodiversity
Promoting biodiversity on your farmland can improve ecosystem health and resilience. Practices such as planting diverse crop species, maintaining natural habitats, and supporting beneficial insects can enhance agricultural productivity and reduce the need for chemical inputs.
What Kinds of Income Can I Make From My Farmland?
Farmland can generate various income streams, offering flexibility and potential for growth.
1. Crop Sales
Selling crops is the primary source of income for most farmland investments. The type and quantity of crops grown will determine your potential earnings. Diversifying your crop selection can help mitigate risks and maximize returns.
2. Lease Agreements
Leasing out your farmland to local farmers can provide a steady stream of passive income. Lease agreements can be structured in various ways, including cash rent, crop share, or custom farming arrangements. Choose the leasing model that best aligns with your investment goals.
3. Agritourism
Developing agritourism opportunities on your farmland can create additional income streams. Activities such as farm tours, pick-your-own produce events, and hosting farm stays can attract visitors and generate revenue. Agritourism can also enhance community engagement and promote sustainable farming practices.
Leveraging Data for Smarter Investments
Investing in farmland can provide numerous benefits, including the potential for solid returns, diversification for portfolios, a hedge against inflation, and low volatility. However, it is essential to thoroughly research and consider the potential risks associated with farmland investments and choose a suitable investment option based on individual goals and risk tolerance. With proper planning and due diligence, investing in farmland can be a valuable addition to any investment portfolio. So, it is no wonder that this "boring" asset class is now gaining more attention from investors worldwide.
If you're interested in purchasing farmland, LandGate can help! View listings for farmland for sale across the country for free today, or leverage our LandApp tool to view listings and analyze the suitability of any U.S. parcel for farming:
