Thinking about different types of investments, farmland may not be the first thing that comes to mind for most people. After all, getting started with this kind of investment can seem complicated and expensive. You usually need to know a fair bit about farming and have quite a bit of money on hand. But times are changing, and it’s starting to get easier for more people to get in on this potentially profitable investment opportunity.
Nowadays, you don’t have to be a farming expert or have a big pile of cash to start investing in farmland. If you’ve got a bit of extra money and an investment account, you’re ready to go. The traditional ways of investing in farmland are still around, but there are also new ways that are easier and more accessible for more people.
In this article, we’re going to look at the best ways to get started investing in farmland. We’ll talk about the new developments that are making this type of investment a more realistic option for more people.
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Why Invest In Farmland?
Investing in farmland can be a smart choice for a variety of reasons, making it an appealing opportunity for investors looking for stability and diversification. One of the main factors that sets farmland apart as an investment is its consistent track record of delivering solid returns in two ways.
Firstly, the value of farmland has steadily increased over the past 50 years. On average, American farmland has experienced a yearly growth rate of about 6.1%, with only a handful of down years during that period. When you factor in the income generated from renting out the land or the crop yields, the overall returns for investors have been even more impressive.
According to the USDA, farmland has produced positive returns every year since 1991, averaging an annual return of 11.5%. In fact, it has outperformed almost all other types of investments, except for the Dow Jones REIT Index.
In addition to the attractive returns, investing in farmland offers other benefits that make it even more enticing.
- Low volatility: Farmland returns have historically been less volatile compared to many other types of investments, including the 10-year U.S. Treasury Bond, S&P 500, gold, and Dow Jones REIT Index. This lower volatility can help create a more stable investment portfolio, reducing the risks associated with market fluctuations.
- Low correlation: Farmland returns typically don’t move in the same direction as the stock market. In many years, farmland has produced positive returns even when the stock market has experienced losses. This means that investing in farmland can provide diversification benefits, helping to mitigate overall portfolio risk.
- Inflationary hedge: Farmland is a real asset that produces essential commodities like corn and grain. This means it can benefit from inflation, as rising prices would increase both the value of the land and the income generated from crop production. Some even compare farmland to a gold-like investment with a yield because it can protect against the erosion of purchasing power caused by inflation.
How to Invest in Farmland
1. Invest in Farmland Directly
Investing in farmland directly can be a great way to own a piece of land that you can then rent out to farmers, generating a steady income. Think of it like owning a residential or commercial property, but instead of apartments or offices, you’re renting out vast stretches of fertile land!
Now, keep in mind, buying a farm isn’t like buying a car or a house. It’s usually quite a big financial commitment. After all, farms are pretty big! On average, a farm in the United States was about 445 acres in size back in 2021, according to the USDA. In 2022, the average price for an acre of farmland was $3,800. So, if you do the math, that’s around $1.69 million to own an average-sized farm!
But don’t let these averages scare you. You might find opportunities that require less investment, depending on the circumstances. What’s the benefit, you ask? Well, owning a piece of farmland gives you control over your investment and the chance for your money to grow in the long term.
2. Real Estate Investment Trusts (REITs)
Think of a real estate investment trust (or REIT for short) as a way for you to own a piece of something like an office building or apartment complex. But did you know that REITs can include farmland too? That’s right, you could invest in a field of corn or a vineyard without ever having to worry about the day-to-day farming activities.
When you invest in a farmland REIT, you can enjoy all the perks of owning real estate, like earning money from your investment, but without any of the hassle of managing the land. You also get the added benefits of being able to spread your investments around, easier access to your money, and you don’t need a lot of cash to start investing.
Plus, an extra cherry on top of this financial sundae is that REITs, farmland ones included, have some tax benefits. They share a big chunk of their taxable income with investors as dividends, making them an attractive option for those looking to generate regular income from their investments.
A couple of well-known farmland REITs you might want to check out are Gladstone Land (LAND) and Farmland Partners (FPI). These offer a chance to dip your toe into the world of farming without having to buy any tractors or worry about crop rotation. By investing in farmland through REITs, you’re essentially buying a stake in the agriculture sector without the need to own or manage the land directly.
3. Agriculture Stocks
An alternative approach to investing in farmland is through agriculture stocks. Instead of purchasing physical land, investors buy shares in companies operating in the agriculture industry. These companies may be involved in various aspects, including crop production, agricultural equipment manufacturing, and fertilizer production and distribution.
By investing in agriculture stocks, investors can benefit from the growth and profitability of these companies. For example, crop producers generate returns from their land and can also benefit from potential increases in land prices.
Some widely held agricultural stocks include Archer-Daniels-Midland (ADM), Corteva (CTVA), and Scotts Miracle-Gro (SMG). Investing in agriculture stocks allows investors to participate in the agricultural sector’s potential growth and profitability, providing an alternative avenue for farmland-related investments.
4. Farmland Mutual Funds or ETFs
Investing in mutual funds or exchange-traded funds (ETFs) provides a convenient way to invest in farmland without the need for individual stock selection.
Some mutual funds have a specific focus on farming, pooling investors’ money into activities that support the agriculture industry. It’s important to note that farmland mutual funds may not exclusively invest in agriculture but may also include adjacent sectors. Investors looking for a pure farmland investment should consider this factor.
One example is the Fidelity Agricultural Productivity Fund (FARMX), which aims to invest 80 percent of its assets in agricultural productivity companies. Its largest holding is Deere (DE), a renowned name in agricultural machinery. When investing in mutual funds, it is crucial to review the associated fees before making any investment decisions.
5. Farmland Crowdfunding Platforms
Crowdfunding websites for farmland investments make it simpler for you to invest in real farms without needing a huge sum of money upfront. Websites like AcreTrader, FarmTogether, and Farmfundr enable you to buy tiny pieces of a real farm alongside other investors, making it easier for people to get into the farming investment scene.
What does this mean? Well, instead of you having to purchase an entire farm yourself, you can invest in smaller parts of a farm with other investors. Usually, you need a starting investment of about $15,000 to $40,000 on websites like AcreTrader.
But, don’t worry, these platforms take care of a lot of the hard work for you. They help you select the land to invest in and manage how the income from the farm is distributed among investors.
However, keep in mind that these types of investments often require you to hold onto your shares for a longer period, typically three to five years. In some cases, you might be able to sell your shares earlier, but it’s not always guaranteed.
Also, investing in just one farm through these websites doesn’t give you as much variety as investing in farm-related mutual funds or ETFs. So, before you dive in, make sure you understand your risk comfort level and what you want out of your investment.
The Bottom Line
Wrapping up, farmland investing has come a long way. These days, you don’t have to buy a whole farm to get in on the action. In the old days, buying farmland meant paying a lot and needing to know a lot about farming. Today, many investors can’t or don’t want to go that route.
Luckily, there are now other ways to invest in farmland. We have Real Estate Investment Trusts (REITs), stocks related to agriculture, investment funds, and crowdfunding platforms. These options make it possible for anyone to invest in farmland without needing to own a whole farm.
With so many ways to invest, people can pick the one that matches their financial goals, how much risk they can handle, and how much money they can invest. Having more types of investment opportunities in farmland means more people can join in. This could lead to more growth in the farming industry, both now and in the future.