The next bull run could be in the backyards of farmers across America. The agricultural sector is thriving, leading investors to snap up vast tracts of farmland.
Most city-dwelling investors may not think twice about the farm their food comes from, or if they could invest in it. Agricultural land is hardly ever the buzz on CNBC or Bloomberg, but perhaps it ought to be.
Agriculture is relatively independent from other markets and can be a safe way to diversify an investment portfolio. Farmland is a good source of passive income. Since food is a commodity, inflation creates higher revenue per crop, causing farmland to rise in value. According to the NCREIF Farmland Index, the value of U.S. farmland owned by investors rose 10.2% in 2022, compared to the average inflation rate of 8%.
Some billionaires have quietly amassed colossal holdings of this rustic, timeless asset. Microsoft founder Bill Gates — the most prominent private owner of farmland in the United States — owns 275,000 acres of agricultural pastures across the country. Meanwhile, this year, even sports stars like Josh Allen are investing in farms, potentially lending the asset some much-needed street cred among younger demographics.
The case for farms rests on simple economics. With a rapidly growing global population and ceaseless demand for food, the demand for farmland is indisputable. This makes it a uniquely diversified investment opportunity that may bring strong long-term returns. Farmland is one of the most lucrative investment properties available.
Yet the right approach must be carefully considered in approaching this unique asset class, whether through index investing options, buying stock in a trust, or direct ownership with tenants.
Farm-To-Table Investing
Farmland has long been a favorite inflation hedge among institutional investors. Yet swapping greenbacks for green pastures is not as straightforward as it sounds.
According to the U.S. Department of Agriculture (USDA), the average farm size in 2021 was 445 acres, and with land costing $3,800 per acre last year, a typical farm could set you back a cool $1.7 million.
These prices mean agricultural lands, like many alternative real estate categories, have remained out of reach for the average retail investor.
Times are changing, however, as new digital platforms bring prairie profits within a click’s distance of urbanites looking to buy land as an investment.
One such platform is Acretrader, which has invested $345 million for its users in over 48,000 acres of farmland.
Acretrader disburses excess annual income from the farms as cash distributions to investors in December after deducting its flat yearly administration fee of 0.75% (of overall farm value) from the total farm income. Other competitors include FarmTogether, FarmFunder, and Harvest Returns. Some of these companies offer crowdfunding for farms, in addition to joint ownership of lands or equity in crop yields.
Another simple solution is to buy stock in publicly traded real estate investment trusts (REITs). This gives exposure to the sector in a simplified index fund. Returns can vary along with portfolio allocation. Some, such as Farmland Partners Inc. (“FPI”), boast a trailing five-year return through mid-October 2023 of 55%, while others, like Gladstone Land (“LAND”), have achieved 18% over the same period.
Pick Carefully
Before picking out a plot, newcomers must get the lay of the land. Last year, the top 10 agriculture-producing states in the country were California, Iowa, Nebraska, Texas, Illinois, Minnesota, Kansas, Indiana, North Carolina, and Wisconsin. This diverse spread means that agriculture covers more than just one region of the continental U.S. Instead, farming powerhouse states stretch from coast to coast.
Investors should be prudent when selecting farmland across the country to assess the best way to optimize profits, whether from crops and livestock, renewable energy companies, or even offering recreational access. A strategic blend of these options can maximize returns.
While the asset class certainly has a certain level of protection against economic headwinds, not every farm is created equal.
Pick a dud, and you could go under. Between 2021 and 2022, over 9,000 farms closed down, says AgAmerica’s Pat Spinosa. According to the USDA, the amount of farmland in the U.S. shrunk by 22 million acres in the last decade.
The consolidation of the market is a double-edged sword. Scarcity could further bump up valuations for successful farms.
Tax Benefits
Aspiring farmers will be happy to know agricultural land may offer tax benefits to investors due to their classification as an agricultural asset.
This can be expedient when it comes to real estate tax, which is a distinct subcategory of a property tax portfolio. Celebrity billionaires and well-heeled litigators have been known to enjoy the tax breaks of classifying their country escape as a farm. However, laws in different states and jurisdictions vary and are subject to change.
Farm investing offers a unique, turmoil-resistant asset class. Moreover, investors can capitalize on the potential growth of the agriculture sector. However, conducting thorough research and seeking professional advice before entering the market is essential. By carefully analyzing the market conditions and understanding the risks involved, investors can make better-informed decisions and potentially reap greater yields from their farm of choice.
This article was produced by Top Dollar Investor and syndicated by Wealth of Geeks.