When you think of “investment,” what comes to mind?
Mutual funds, trusts, ETFs, real estate, stocks, and bonds are considered to be investment opportunities in traditional portfolios. You wouldn’t be wrong for thinking of these, and they’re probably what your current portfolio largely consists of.
But one major investment is too often overlooked. Most people see it everyday and don’t think twice about it. It covers landscapes, employs millions, and sustains the world’s ever-growing population.
While the benefits of investing in farmland may be obvious to some, you rarely find it as part of your traditional investment portfolio. Why? To put it simply, the infrastructure has never existed.
Conventionally, farmland is privately held and passed down by generations of families that have worked the land their entire lives. But, as rural areas grow and younger generations leave home to work in urban areas, the land ends up on the market, available for purchase or investment.
With all that said, what makes farmland a sound investment?
For the savvy investor, you’re probably aware of inflation-hedged investments. For the uninitiated, inflation hedging is a type of investment that protects an investor against a decrease in the purchasing power of money. In layman’s terms, these types of investments make sure that the value of your money remains the same as the cost of goods and services increases over time.
Traditionally, gold has been the staple of inflation hedging investments. The value of gold appreciates (increases) over time, and therefore will not lose its value in relation to inflation.
Farmland vs. Gold: Inflation Hedging
While gold is the most popular of these types of investment, farmland has outpaced gold in the long run. In fact, it isn’t even close.
Cumulative returns on farmland investment have increasingly outperformed gold over the past thirty years, and the gap is growing.
As the world’s population grows, it needs to be fed. The price of food tends to increase in lockstep with inflation. So, as inflation rises, so does the price of food, as does the value of the land that produces it
Having a diverse portfolio is one of the first things you hear about when you start to invest your money. Putting too much into one business, sector, or industry can be devastating in times of crisis and volatility. But, just because your portfolio is diverse, doesn’t mean that you’re free from potential losses.
Recent examples of the 2008 Financial Crisis and COVID-19 have taught us that stable investment opportunities aren’t always so, and the unexpected finds a way to rear its ugly head into any portfolio.
Farmland, however, is favorably diverse. Farmland negatively correlates with other asset classes, and only slightly correlates with real estate. This means that while other assets reduce in value (stocks, bonds, etc.), land prices increase, as do the yields from agricultural projects.
Of course, this also depends on the type of farmland you choose to invest in. Different crops offer higher or lower cost of yields, and may be more or less subject to market volatility. However, the core of your investment, the land itself, continues to rise in value.
Many investors have been burned by the promise of stability. Banks are a most recent example, as Lehman Brothers shuttered because of the 2008 Financial Crisis and the offering of subprime loans on real estate ventures.
Many private and corporate investors are looking to “set it and forget it,” as Nav Athwal notes in his Forbes article on farmland investing.
The beauty of farmland is that regardless of the factors that would throw some investments into flux, people still need to eat. By 2050, experts project that the world population will grow by another 2 billion, totaling 9 billion humans. Since the beginning of the 20th century, the amount of available agricultural area around the world has continually spiked.
Now, it would be naive to say that there are no outside factors that affect the price of crops. Certainly, we have seen the effect that tariffs and geopolitics can have on the cattle and dairy industries in the US and Canada.
However, the land that the crops occupy rarely depreciates its value as a result of these issues. Comparatively, farmland is one of the most stable investments you can make. Plus, unlike many “stable investment opportunities,” the capital appreciation is there too.
No, we don’t mean crops. As you would expect, farmland has produced high yields for investors over the past two decades. In fact, row crop farmland has consistently produced cash income of between 4% and 8%. This doesn’t just come from the crop yields themselves, either. Billboards, hunting leases, timber sales, and renewable energy are some unexpected sources of income.
Factors Affecting Farmland Income Yields
However, since 1992, farmland has consistently yielded returns over 10%. These yields are income based, and are therefore affected (negatively or positively) by crop yields, types of crops, weather conditions, natural disasters, and more.
Location also affects crop and income yields. Land that is more seasonable (e.g. New York State or the Midwest) will only yield crops for a certain time of the year. Farms in Florida and California, however, will produce all year round. These are important considerations for any investor looking to farmland as an opportunity.
One of the most exciting aspects of farmland investment is the capital appreciation of the land itself.
The Motley Fool defines “capital appreciation” as “the increase of an asset's market value relative to its purchase price or cost basis.” While many investments grow in value over time, farmland is a very specific, stable, and consistent case of capital appreciation.
Just take a look at the value of Iowa’s farmland between 1982 and 2010:
Globally, the demand for agricultural products is increasing. However, the supply of arable, workable land is steadily declining. This is the result of climate change, legislation, and the protection of parks and wildlife.
As a result, what land is currently in use is steadily increasing in value. For the last two decades, “the value of average farmland in Indiana has increased by 7.4%” according to Ceres Partners.
It seems that this phenomenon isn’t going away anytime soon. Climate change is a continuing challenge for global agriculture, and farmers are being asked to do more with what they currently have. As they do, the land may provide more crops as well, increasing income yields that will net investors more value beyond the capital appreciation of the land itself.
Apart from all the traditional factors concerning investment opportunity, investing in farmland allows individuals to finally have a say in the way our food is produced, extracted, and distributed.
As farmers hand their generational land down to children who sell it, corporations are increasingly taking over the world’s agricultural landscape. As Roberto Ferdman at the Washington Post describes it, “today’s farms are fewer and bigger.”
Investing in farmland allows us to push the boundaries of agriculture. It allows us to try new things and create a better world through sustainable, eco-friendly practices. And finally, it allows us to put the fruits of our collective labor back into our own hands.
At FarmTogether, that is our vision. With over 70 years of collective experience across farmland investing, agriculture, and real estate in the US and globally, we know what we’re talking about.
We firmly believe that farmland is a safe, stable, and attractive long-term investment for almost any investor.
Download our free Farmland Investment 101 White Paper to learn more about farmland as asset class