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How to Invest in Farmland – Definitive Guide

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Investing in Farmland

If you’ve never thought of investing in farmland, now might be an outstanding time to give it some consideration.

You’ve probably not heard much about the investment potential of this asset class.

But it turns out to be one of the very best long-term investments you can make.

There are at least seven reasons to consider becoming an investor, and long-term profit potential is only one of them.

It’s an interesting situation too – maybe even an apparent contradiction. Farming as an occupation has been on the decline for more than a century.

Small farms are being put out of business by large corporate farms. And the business of farming on a small scale is a losing proposition in most cases.

Sure, there are plenty of examples of privately owned farms producing and selling organic produce a to willing public.

But the majority of farmers barely get by, and often do so only with the help of outside income sources.

But we’re not recommending you become a farmer here. Instead, we're suggesting that you consider investing in farmland itself.

Even if small farming isn’t terribly profitable, farmland itself can be an extremely valuable investment.

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7 Reasons for Investing in Farmland

As unconventional as farmland seems, there are actually compelling reasons to invest in it.

We were able to come up with at least seven, and there are certainly more.

1. The World’s Population is Growing – Which Means More Mouths to Feed

According to the United Nations, the world population – currently sitting at about 7.7 billion – is expected to grow to 9.7 billion by 2050.

That means there will be an additional 2 billion mouths to feed.

It’s true that an increasing amount of food is being produced out of the world’s oceans and seas, as well as from aquaculture and hydroponics.

But the vast majority of world food production continues to be grown on farmland. That’s not expected to change significantly in the future either.

It follows that as the world’s population grows, the demand for food – and the value of farmland – will continue to increase.

2. “Buy land. They ain’t making any more of the stuff”

That quote is attributed to Will Rogers, and while the statement seems painfully simple, it’s also right on the money.

Not only is the supply of land fixed, but as noted above, the population of the world continues to grow at a rapid pace.

That means the amount of land needed for human occupation is also growing. But closer to the point, the world’s great cities and metropolitan areas are largely built over what was once highly productive farmland.

That’s a major reason why many cities came into being in the first place. And as they expand outward, they consume ever more land, including farmland.

That explanation actually understates the magnitude of the problem. While the United States is one of the world’s leading producers of agricultural products, we are also notorious for suburban sprawl.

Older, core cities occupy relatively little land. But the suburbs surrounding each city can easily cover thousands of square miles.

This is because the suburban areas are built with much lower density levels than the inner cities. 

And in the Sunbelt, even the cities themselves have lower density levels. There’s little evidence this trend will stop, let alone reverse, in the foreseeable future.

But urbanization isn’t the only threat to the amount of land available for farming.

A rising global population, in combination with climate change, are resulting in a phenomenon known as desertification.

That’s where once arable farmland dries out and becomes unproductive. It is now estimated that about 40% of the world’s land surface has gone dry and unproductive.

Unfortunately, this process seems to be accelerated in areas that are experiencing the fastest population growth.

3. Farmland has Produced Substantial Investment Gains

There is significant evidence farmland has not only turned positive results over the last few decades, but even that it’s outperformed more traditional investment asset classes.

An article appearing on Seeking Alpha last summer, Farmland as an Investment Asset Class shows that farmland outperformed virtually every other asset class.

That includes the S&P 500, AAA bonds, gold, and even real estate investment trusts.

Historic U.S. Farmland Returns

Chart of historic farmland returns from 1972-2016

As the usual disclaimer goes, past performance is not an indication of future returns. But since the past is all we have to go on, the results speak very well for US farmland.

Returns this generous, particularly over a space of nearly 4 ½ decades cannot be ignored.

It makes a strong case for clearing at least a small space in your investment portfolio for a position in farmland.

4. Farmland is a True Alternative Investment

Farmland has value because it’s productive. That alone makes it an asset. But it’s an asset in a class by itself, making it a true alternative.

The average investor has most of his or her portfolio invested in “paper assets”, like stocks, bonds, funds, certificates of deposit and bank accounts.

But all those assets are in the same category – each represents someone else’s liability.

That means the potential for a fall, or even simultaneous decline in value, is a real possibility. After all, the entire financial system of the world is tethered together.

Farmland is a true alternative investment because its value is not tied to the performance of other assets.

For example, the stock market could fall substantially, while farmland retains its value, or even rises due to economic or political factors.

Farmland even represents a diversification away from residential or commercial real estate.

Since both are dependent upon interest rates, employment levels, and the general state of the economy, they can fall in value during the same crisis.

But farmland is productive in and of itself, and may retain its value or even increase while residential and commercial property are in decline.

5. Farmland is a “Hard Asset”

Some investors like to hold physical assets, like gold and silver, as “portfolio insurance”. 

Since precious metals are not someone else’s liability, they often retain value or increase when paper assets are collapsing.

Farmland is a similar type of hard asset. Once again, its value isn’t tied to the financial markets, or even to the residential or commercial real estate markets.

And it has a significant advantage over precious metals, in that it actually produces something – food.

Food will always have economic value, but it’s entirely possible it will be worth even more in a serious crisis.

We also need to consider the inflation factor. The US national debt is now bigger than the economy.

Meanwhile, the government continues to run annual deficits representing a significant percentage of the total federal budget.

Both conditions are recipes for inflation, especially when you consider the political pressure building to usher in massive spending programs, like student loans debt forgiveness and universal health insurance.

Though federal planners have been highly successful in channeling excess monetary creation into financial assets and metropolitan real estate in the past two decades, the possibility of that flow shifting into consumer items, like food, is more than remote.

If it does, the value of farmland could explode.

6. The World Can’t Survive Without Food

Farm Crops

This is the simplest argument of all in favor of farmland. Food is like air, water and sunshine, in that we cannot survive without it.

It will always have value, no matter what the state of the economy is, or which way the political winds are blowing.

The fact that food will always have value, virtually guarantees farmland will always have value.

The same can’t be said of stocks, bonds, or even residential or commercial real estate.

In a real way, food production puts a floor of value underneath farmland.

7. Food is an International Commodity

One of the economic realities of the world is that food production is not evenly distributed around the world.

Some of the most crowded countries in the world produce relatively little food.

For example, both Japan and Great Britain import a significant amount of their food each year, despite being rich, highly industrialized countries.

By contrast, Canada and Australia are thinly populated, and both produce and export large amounts of food.

The United States is practically unique, in that it’s both crowded and produces a large amount of food each year.

In more extreme examples, many countries in the Middle East produce a surplus of oil. But they produce relatively little food, and are forced to import it from other countries.

The bottom line is that global food production and distribution are highly unbalanced.

That isn’t noticeable during a time of peaceable economic exchange as we have right now. But during times of international turmoil, that situation can change quickly.

People may be able to cut back on consumption of oil, but demand for food will be relatively constant no matter what.

Put another way, under different economic and geopolitical circumstances, food can turn into a political weapon. It's value will rise, as will the land that produces it.

Now that you are aware of the many reasons to invest in farmland, let’s take a look at how to do it.

7 Ways to Invest in Farmland

Even though farmland is not well known as an investment, there are a surprising number of ways to invest in it.

Below are seven examples.

Buy a Farm

This is one potential way to invest in farmland, though it’s not one we strongly recommend. It does require a considerable amount of capital, as well as an often unhealthy amount of debt.

As noted at the beginning of this guide, the business of farming is not always a profitable one. And you may need to wait many years before your investment pays off.

Yet there are small farms that are profitable. Usually they’re those that are on the edge of metropolitan areas or near large towns.

The close proximity enables them to sell their products directly to the general public.

It can be especially profitable with specialty crops, like organically grown fruits and vegetables, eggs, and seasonal items, like pumpkins or Christmas trees.

But for close-in farmland, the greatest potential profit may come from real estate developers.

Farms represent an opportunity for developers to build large tract-type neighborhoods in areas far out enough to be lower in price, but still close enough for commuting purposes.

It’s one way to invest in farmland, but it’s also the most capital intensive, as well as the most risky.

Stock in Farm Related Companies

If you’re not interested in buying a farm – and that’s not recommended because it’s as much an occupation as it is an investment – you can invest in farmland without getting your hands dirty or risking your life savings.

Just as there are companies engaged in virtually every type of business and industry in existence, there are those in the business of farming.

By buying stock in those companies, you’ll be getting an indirect participation in the farmland they operate on.

There are also many ways to play this. For example, you can invest in the stock of companies that operate farms and produce crops and livestock.

This can include companies like Fresh Del Monte Produce (NYSE: FDP) and Adecoagro S.A. (NYSE: AGRO).

But companies that grow food are not your only option here. Like every other broad industry, farming has a large number of supporting businesses.

Examples include:

If you do choose to invest in individual stocks related to farming and farmland, remember that they carry all the risks of investing in individual companies inherent in any economic sector.

Even if the industry in general is doing well, the stock of a specific company could fall based on factors unique to that corporation.

Mutual Funds that Invest in Farming and Related Industries

If you’re not comfortable investing in individual stocks, you can instead choose to invest in farm related mutual funds.

These are professionally managed portfolios that select what they believe will be the best performing stocks in the industry.

However, it can be difficult to find mutual funds that invest exclusively in farm related industries.

More commonly, they’re more broadly invested in resource companies, which may include mining and energy, as well as food production.

Another issue is minimum investments. Many mutual funds require a minimum investment of $3,000. That may not be a problem for someone with a six-figure investment portfolio.

But it will exclude many small investors, who prefer not to invest such a large amount of money in a single industry sector.

Finally, there’s the issue of fees. Mutual funds frequently charge load fees, which can range between 1% and 3% of the value of the fund, though some can go as high as 8%.

The fund can charge a 3% load on the upfront purchase of the fund, or break it down between purchase and sale.

For example, they may charge 2% to buy into the fund, then 1% when you sell out.

Agriculture Exchange Traded Funds (ETFs)

If you’re not comfortable that any specific farm related mutual fund has the potential to outperform the general market, and most don’t, you can choose instead to invest in ETFs.

Since most ETFs are index funds, which is to say they are designed to match an underlying index for that industry sector, the performance of the fund will match that of the index itself.

The ETF won’t outperform the underlying market, but it won’t underperform at either.

In addition, ETFs typically have lower expense ratios than mutual funds, and don’t charge load fees.

Examples of broad agriculture ETFs include Invesco DB Agriculture Fund (DBA) and RICI-Agriculture ETN (RJA).

But in addition to broad agriculture, you can also invest in ETFs that specialize in specific farm products, like corn, wheat, or soybeans.

ETFs give you that kind of choice.

Farm Commodities

It’s not a direct investment in farmland itself, but by investing in commodities you will be betting on the production that comes from that land.

What’s more, you can choose very specific farm products, like wheat, corn, soybeans, sugar, coffee, and many others. You can even choose certain livestock products, like pork bellies.

And as you might expect, there are funds available that will enable you to invest in groups of farm related commodities, removing the risk that comes with taking positions in individual ones.

This is not a practice for the faint of heart or those with small portfolios.

There are many factors that can affect farm commodities, even apart from farmland itself.

For example, bumper production around the world could send the price of a certain commodity down.

After all, food production is a global commodity, and rising production in India and Australia can have a negative effect on a commodity owner in the US or Canada.

But the flipside is equally true. Widespread drought or pest infestations can seriously lower crop production, because the value of commodities will rise in value on short supply.

There’s a strong element of speculation, that makes commodities less of a long-term investment, and more of a short-term play based on near-term circumstances.

Be sure you know what you’re getting into before going the commodities route.

Real Estate Crowdfunding

Crowdfunding has been coming up rapidly in the past decade in a number of sectors that once were served only by banks.

Examples include lending platforms, like Lending Club and Prosper, and the many real estate crowdfunding platforms dedicated to investing in residential or commercial real estate.

But as you might expect, real estate crowdfunding has also come to farmland.

It presents several ways to benefit from direct ownership in farmland that other investment vehicles on this list don’t provide.

Two of the most prominent examples of farmland related real estate crowdfunding are AcreTrader and FarmTogether. 

Each rates a discussion all its own.

AcreTrader

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AcreTrader allows investors to buy actual parcels of farmland. But you’re not actually purchasing the farmland directly.

Instead, you’re able to purchase shares of a farm property. That gives you the ability to select the farms you want to invest in, and to spread your investment across several different properties.

Much like a real estate investment trust, income is earned on your investment through a combination of income from rents on the land and/or from capital gains upon sale of the properties.

As a real estate crowdfunding platform, AcreTrader acts as a farmland marketplace.

Farmers can sell their land, or parcels of it, to investors on the platform, who buy interests in those farms.

But the company leases the land to reputable local farmers who pay rent to farm them. Rents are collected in advance of the planting season, to lower the risk of non-payment.

You’ll need a minimum investment of as little as $3,000 to as much as $10,000, which depends on the particular property you want to invest in.

You’ll invest in shares of each property, with each share representing one acre of farmland.

It’s also a long-term investment, with an expected payout of between five years and 20 years.

This gives the property time to rise in value, which is a common practice among real estate crowdfunding platforms of all types.

You should be aware that farmland crowdfunding is generally reserved for more sophisticated investors.

To participate, you will need to be an accredited investor. That will require a minimum annual income of $200,000 for the past two years (or $300,000 if you’re married), or a minimum net worth of at least $1 million, not including the value of your primary residence.

Should You Invest in Farmland?

As you can see from the details in this guide, there are compelling reasons to invest in farmland. But one of the best may be that we’ve been on a track of rising financial asset prices for more than a decade now.

That longevity is highly unusual, and suggests a turning may be coming soon. Pre-positioning yourself in non-traditional assets, like farmland, may be the best way to add future growth to your portfolio.

It will also serve to reduce your positions in asset classes that are about to take a major fall.

If you do decide to invest in farmland, you can see there are at least seven ways to go about it.

If you’re interested in farming as an occupation, you can certainly buy a farm directly.

But if you prefer arms-length investing, you can consider stocks, mutual funds, ETFs, commodities, and REITs.

Each will put you in a position to benefit from rising values of commodities and farmland.

But if you want more direct control over the farmland investments you’re making, look closely into real estate crowdfunding.

You’ll need to be an accredited investor. But if you have any awareness at all of the farming industry, real estate crowdfunding will give you an opportunity to select the individual farm properties you’ll be investing in.

That’ll give you a chance to choose the properties that have the best combination of producing annual returns and long-term capital gains.

Sooner or later, a major shift is going to hit the financial markets. When it does, owning hard assets – like farmland – will be one of the best strategies to minimize the impact.

And in the meantime, you can enjoy the annual returns and long-term capital appreciation that farmland has been providing for decades.

AcreTrader

Acretrader is a farmland investing platform that allows you to invest in U.S. agricultural land and start building a portfolio of quality farm land real estate in just minutes online.

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