Farmland investments are growing in popularity, and with good reason. They have historically outperformed many other asset classes and bestow some unique benefits on investors.
Chief among their offerings is the safety of bonds with a higher yield, real asset ownership, better performance than traditional real estate investments, and tax benefits.
Also, farmland investments can safeguard an investor against inflation, they offer low volatility, and their yields historically have not correlated with those of traditional investment assets such as stocks.
Although institutional investors have been onto the benefits of farmland investing for some time, they account for less than one percent of the asset class. This leaves an open door for investors to reap the benefits of farmland investing.
Over the last 47 years, the rate of return on U.S. farmland is 10.27%, outperforming real estate and stock returns.
The returns over the last two decades are even better. Farmland investments yielded an 11.98% percent return. While real estate yielded 8.68%, and the Stock Russell 3000 yielded 8.78%. The performance of the last two decades promises to continue as crop yields improve, the population continues to grow, diets improve, and farmland supply decreases.
The benefits of farmland investing are tied to real and measurable global macroeconomic forces that promise to steer long-term growth in returns on farmland investments.
Population growth: Over the past half-century, the global population has more than doubled from 3.7 billion in 1970 to 7.6 billion in 2018.
As the global population expands demand for food continually grows. Since there is only a fixed supply of farmland for sale, one can expect that farmland investment will produce long-term value, as well as generating respectable income streams from production.
Growing Asian middle class: The global middle-class expansion is expected to increase over the next decade faster than at any other time in history. According to the Organization for Economic Cooperation and Development, by 2030 two-thirds of the global middle class, or 3.3 billion people, will live in Asia. This group will demand a higher quality diet in terms of both quantity and quality putting increased demand for farmland and agricultural products.
For farmland investors, increasing crop yields equal long-term growth and attractive returns.
Investors can thank farmers who are rising to the challenge to meet the growing demand for food by increasing their crop yields. Some farmers have embraced “precision farming” which employs the use of technology to increase yield.
Among other technologies, farmers are using drones and scanning systems to monitor the health of individual plants in real time. With this information, they deliver water, nutrients or pesticides to only the plant that needs it – adding to their yield.
Not only do farmland investments offer high yields, but they can also provide investors with cash flow and real asset ownership.
Cash Flow: Farmland investors can generate cash flow in the form of rent payments from farmers by leasing the land for farming. In this way, investors enjoy cash flow that is relatively free from fluctuation.
Rental income may be fixed or variable, depending on the terms of the agreement and starts before the lessee steps onto the property. Leasing the property carries very little risk as there is no outlay of investment to create the production.
Lease agreements can also include a sharecropping agreement where the lessee farmer provides the investor with a percentage of the returns on the harvest.
Real asset ownership: Farmland investments offer an investor the unique opportunity to couple financial investments with the ownership of a real asset – farmland. It provides the investor with inherent appreciation and an annual income supported by bond-like safety.
Real asset ownership in the form of farmland property benefits the investor in ways traditional real estate investing cannot. There is preferential property tax treatment compared to other types of real estate and a good return compared to stocks and bonds.
According to the U.S. Department of Agriculture’s ERS database, agricultural land value has returned an annual average of 10.25 percent over the period from 1970 to 2009. During that same period, the S&P 500 returned 6.24 percent, and the 10-Year Treasury returned 7.3 percent. The U.S. Consumer Price Index during that period averaged 4.36 percent.
Farmland investments add value in diversifying an investment portfolio. They offer low volatility, diversification and a safeguard against inflation.
Low volatility: In the past, investors interested in farmland investments had only the commodities market to buy and sell investments. The commodities market is a volatile market characterized by large swings. The investor was tied to the performance of a specific commodity, such as corn.
However, directly investing in Farmland has proven to be one of the safest asset classes enjoying consistent low volatility. Compare the deviation of stocks from 1992-2016 of 17 percent with the deviation of farmland investment of 6.9 percent over the same period.
Diversification: Farmland investments offer investment portfolio diversification as they hold little to no correlation with other asset classes. Farmland investors can also diversify their farmland investments by investing in several farms.
The options for diversification are almost endless. A farmland investment portfolio itself can be diversified to include row crops – corn, soybeans and wheat, permanent crops such as nut and citrus trees or investment in farm-related industries such as water treatment or grain storage.
Hedge against inflation: Farmland investments offer investors a strong hedge against inflation – making them another must-have in a healthy portfolio.
Returns on farmland investments outpace the inflation rate. Further, farmland investments have built-in protection against inflation since commodities are an indicator of inflation.
When inflation rates rise, so too do commodity prices. Also, when commodity prices rise, land values also increase.
This three-pronged hedge against inflation offers investors a layer of protection against inflation that could typically drive their stock and bond yields down.
Farmland investment represents a unique class of investment with the characteristics of low risk and good performance which makes it an excellent choice for the investor who seeks to diversify their portfolio. Moreover, global economic forces promise to drive long-term growth in returns on farmland investments.
To learn more about about the benefits of adding farmland in your portfolio, check out our “Why farmland?” page!
Download our free Farmland Investment 101 White Paper to learn more about farmland as asset class