If you are looking for a unique way to invest your money, you may want to consider investing in agriculture.
Farmland has historically high returns, and you can invest in agriculture with or without purchasing a farm outright. Read on to learn more about how to invest in farmland and begin to discover if this is the right investment for you.
Farmland has historically seen stable growth. In the past 20 years in the U.S., farmland has seen average annual returns of 11% – 12%. If we look at this in contrast to real estate, which has seen a growth of less than 9%, farmland seems to be an attractive long-term investment.
Supply and demand is also a factor. Why? There is only so much available farmland. When there is a limited supply of something, the need for it increases. What follows is an increase in the price of the land.
Farmland also sees less volatility than most markets. Globally, people rely on agriculture for everything, from food to alternative fuels. There are constant needs and constant growth within the industry. Additionally, farmland is both inflation and recession-resistant. In the U.S., the market is over $2.5 trillion, and globally farmland is over a $9 trillion industry.
Farmland historically has not been correlated to other investment assets. Due to farmland and agriculture operating relatively independently from other markets, it can be a safe way to diversify an investment portfolio. Additionally, due to it being a food commodity, inflation will cause a higher income per crop, thus causing farmland to rise in value.
How Can I Invest in Farmland?
According to Forbes.com, farmland represents a nearly $9 trillion market globally and has historically high returns. Agriculture is necessary globally to feed people and animals alike, so many see investing in farmland as recession-proof. While investing in a farm specifically isn’t for everyone, there are a few options for people interested in this type of investment.
How To Invest In Agriculture
1. Purchasing Farmland Directly
When considering purchasing farmland, perhaps the most obvious choice is to purchase it directly. Even if you are not a farmer, direct ownership in farmland can produce high returns. This option typically requires hundreds of thousands of dollars in investments or a mortgage to pay for the land over time.
Many landowners do not farm their land. In fact, according to the USDA, roughly 40% of farmland is currently rented.
Farmers can rent property from landowners to farm it themselves. These lease agreements typically last several years, and the farmer rents the ground for more than the mortgage cost.
In this agreement, the farmer rents the land for more than the mortgage costs. This way, the landowner can pay their mortgage and build equity in the property without farming themselves. The farmer can generate income through farming without having to come up with the money to purchase the land.
2. Real Estate Investment Trusts
Purchasing a farm outright can be incredibly expensive, and many expenses go along with farming. These expenses include seed and supplies, equipment such as tractors, paying for labor, and more. One solution to this is farmland REITs (Real Estate Investment Trusts). A REIT is a group of investors that purchases a farmland portfolio and then leases it to farmers. Two of the largest REITs that you can research are Farmland Partners Inc. (FPI) and Gladstone Land Corporation (LAND).
You can also invest in farmland online. AcreTrader is an online platform that allows investors to purchase shares in a farm. They behave as a middleman between farmers or landowners and investors. They do all the back-end work, including selecting which farmland has the highest opportunity for return. They allow investors to purchase shares in the farmland.
The company handles all the investment management and works directly with the farmers and managers to ensure that their investors are protected. The average return on AcreTrader is 3-5% but can exceed 10% depending on the land. Investors can also sell their shares of farmland on this platform. The platform recommends holding shares for at least 3-5 years.
Similar to AcreTrader, FarmTogether behaves as the middleman between landowners and investors. They act as a middleman between farmers or landowners and investors. They do all the back-end work, including selecting which farmland has the highest opportunity for return. They allow investors to purchase shares in the farmland.
The company handles all the investment management and works directly with the farmers and managers to ensure that their investors are protected. FarmTogether targets returns in the 8-12% range. Investors can also sell their shares of farmland on this platform.
How Can I Invest in Agriculture Other Than Farmland?
If you decide that investing in farmland is not for you, there are several other ways you can invest in agriculture. Several industries directly support farming, including equipment and services. Here are a few ways that you can invest in agriculture without directly investing in farmland:
3. Purchase Stocks
Another option is to invest in equity in the agriculture industry. Several publicly traded companies in the farming sector and investors can invest in stock in these companies. Some of these equities are supporting industries to farmland, such as fertilizer and seeds, equipment, and distribution or processing.
This is a good option for people who are already involved in stock trading and are interested in purchasing in the agriculture industry. Large companies that you may want to consider are Deere & Co (D.E.), Monsanto Co. (MON), and DowDuPont (DWDP).
4. Mutual Funds & Exchange Traded Funds (ETFs)
A third option is to explore mutual funds and exchange-traded funds (ETF). If you are interested in purchasing stocks but aren’t sure which ones will yield the highest returns, you can mitigate risk by purchasing a farming-focused mutual fund or ETF. Some examples include Invesco D.B. Agriculture Fund (DBA) or iShares Global Agriculture Index ETF (COW).
These companies purchase shares of the stocks above, such as Deere & Co or Monsanto, and bundle them into a fund that is meant to replicate the agriculture industry's performance as a whole. Then, investors can buy shares of the fund. These funds typically have medium risk and offer middle-of-the-road returns.
It is important to note that mutual funds and ETFs often have fees associated with them. Be sure to consider the costs associated with these trades before investing in a mutual fund or ETF.
5. Invest in Farm Debt
If you would instead not invest in equity in farms or related markets, you may want to explore lending to farms. Farmers often take on debt each season because the industry is so capital intensive. Typically, a farmer will finance expensive equipment such as tractors and pay them off over several years. They likely also have a mortgage for their land.
Additionally, they will have to purchase seeds and make other significant annual investments to pay off after selling their harvest. They need short-term loans to make these yearly purchases.
You can purchase long and short-term farm debt both directly and through bonds. The farmer or landowner will pay back the loans monthly or quarterly, and you will receive consistent cash flow. It is wise to remember that when you purchase debt, there is a risk that the debtor will not make their payments.
However, if you find a farmer that is in good standing, you likely will have found a reliable investment opportunity.
Is Farmland a Good investment?
Another way we might ask the question – can you make money in farmland?
When you analyze potential investment opportunities, you should consider your goals and evaluate the pros and cons before deciding to invest. There are many reasons to invest in agriculture, such as farmland. Here are a few ideas to consider.
Pro: Agriculture is Always Needed
In short, people will always need to eat. Both livestock and crops contribute to the global need for nourishment. Additionally, scientists are finding new ways to create fuel from plants and other ways to use vegetables. The global population is growing, and so will the need for sustainable agriculture. Agriculture is a commodity and is mostly recession-proof due to the constant demand for food.
Pro: Farms Are Becoming More Productive
Farms are growing, and technology is contributing to a more consistent yield. Information Technology makes everything from the supply chain to finance farm management more seamless and less risky by leveraging data.
Automation has made farms more efficient and can leverage data to optimize production cycles. Robotics and use drones to fertilize, and autonomous driving capabilities allow tractors to self-drive.
Con: Weather Can Be Debilitating
Anything from flooding to droughts can cause drastic fluctuations in the productivity of a farm. Climate change is out of our control, and a swing in temperature or other environmental factors can make or break a farm’s yield.
A farm could underproduce or have a low-quality yield as a result of weather patterns. This means that investing in farms and farmland can be very risky.
Con: Finance in Agriculture is Unstable
The costs of supplies in agriculture is rising. Tractors, while a necessary expense, is being outfitted with the most updated technology. This technology has myriad capabilities, including optimizing and automating seed planting distance and automated soil testing. However, this makes the equipment very expensive, and some farmers will argue that the return on these ‘smart farming’ capabilities is not worth the expense.
The global population is increasing. As people inhabit more land, the land available for farming is decreasing. This, therefore, drives up the price of the property. While this may also increase agricultural products' price, it also means higher expenses for landowners and farmers.
Con: Politics Plays a Role
Trade wars can directly affect farms and other sectors of the agriculture industry. For example, the U.S. International Trade Administration reported that American agricultural exports to China fell from $15.8 billion in 2017 to $5.9 billion in 2018. This is directly affected by the U.S.’s so-called trade war with China. You may want to consider who purchases the product that a farm produces before investing in it to mitigate your risk.
The Bottom Line
Farmland has been consistently growing faster than other markets in the last several decades. There are over two million farms in the United States, and globally, the market will continue to grow with population growth. An agricultural investment like farmland offers an excellent alternative investment option.
While there are several ways to invest in farmland, there are also options to invest in other agriculture areas that can also yield high returns. Be sure to investigate the pros and cons of each field of agriculture before deciding where to put your hard-earned investment budget.