Source: CNN Underscored
Money actually does grow on trees when you invest in farmland planted with long-lived crops like apples, almonds, pistachios and pecans. Farmland can deliver returns in the same manner as other real estate investments — through income and appreciation — but usually on a longer timeline. But before you dig into farmland investing, it’s important to have realistic expectations about this niche sector.
First, take off your rose-colored glasses: Agriculture investment sounds like a nostalgia-tinged way to put money into family farms like the one your grandparents or great-grandparents may have owned and operated.
Supporting an iconic way of life might be an intended byproduct of putting some of your money into farmland, but be sure you are clear-eyed and clear-headed about your intentions for this boutique category.
“We’ve had folks saying, ‘I want to invest because it’s beautiful,’” said Carter Malloy, founder and CEO of AcreTrader, an online farmland investment platform and database. “People will say, ‘I want to invest in that farm because it’s near my grandparents’ farm.’ Removing our own biases is challenging.”
Farmland investments are structured in the same manner as other real estate investments. Investors reap an income stream from rents and then, when the property is sold, by a gain in value.
Ground your expectations in data regularly generated by the National Council of Real Estate Investment Fiduciaries (NCREIF). According to its first-quarter 2024 report on farmland, the total yield for the annual cropland tracked by NCREIF during the prior 12 months was 9.1%, comprised of income from rents (3.3%) and property appreciation (5.7%).
Pros | Cons |
Offers the potential for income and price appreciation | Requires specialized cultivation and management for consistent returns |
May provide diversification to a portfolio of equities and fixed income | Money may be locked up in private farmland funds for many years |
Minimum investment for farmland REITs is simply the cost of one share | Weather and other natural forces can directly impact farmland financial results |
Land itself has intrinsic value, pointed out Charlie McNairy, CEO of International Farming, which manages a $1.5 billion portfolio of agricultural land. But the income stream investors crave stems from the type of crop planted on that land.
Annual, or row, crops are planted and harvested each season. They include American staples such as soybeans and corn as well as produce like lettuce, beans, tomatoes, potatoes and the like.
Permanent crops take longer to mature but then yield crops for decades. Groves of apple, pecan, almond and pistachio trees and vineyards all demand specialized cultivation and management to yield consistent returns.
It’s imperative to understand how farmers manage the land because that not only affects investors’ income stream but also the long-term value of the land itself, McNairy stressed.
“If a farm is not managed well, you can have runoff and soil degradation. Be sure you have a good farmer on the land, and be sure you have cover crops that put nutrients back into the soil,” he said. “You don’t want a situation where you buy a farm and the farmer doesn’t use proper farming techniques, and the soil degrades, and it degrades your asset.”
While land leases are generally impervious to weather, farm operations are not. Natural conditions — weather, climate change, and water access and quality — directly affect farmland financial results and, potentially, management of the land.
Often, farmland investments, especially through private funds, are long term, both McNairy and Malloy said, with investors required to leave their money in the investments for the entire term.
As with other forms of real estate investing, options range from direct ownership and hands-on management to publicly traded real estate investment trusts(REITs) that offer the same liquidity as any other fund.
Farmland leases tend to be long term and count on the ability of the farmer to extract full value from the land, while replenishing it is paramount. Direct ownership and management of significant acreage also requires hundreds of thousands, if not millions, of dollars, said McNairy.
Private investments, usually through partnerships or funds, pivot on professional management, with commensurate fees. Often, such investments stipulate terms of five to 10 years, and it can be difficult for investors to extract themselves from the fund early.
A few publicly traded REITs are comprised solely of farmland or related properties, including Farmland Partners (FPI) and Gladstone Land (LAND). As with all REITs, it’s important to scrutinize the paperwork and prospectuses to fully understand how fees are structured and what investors will likely gain, after fees. Publicly traded REITs enable investors to buy and sell as they want, supporting maximum liquidity and personal cash flow management. While private REITs have their own minimum investment requirements, often a few thousand dollars, the minimum to invest in a publicly traded REIT is simply the cost to buy a single share. One caveat: Private REITs are thinly traded and can be difficult to liquidate.
Land is, of course, integral to crop production and foundational to the food supply chain. But farmland is usually owned and operated independently of major food processors and suppliers.
It is possible to invest in farmland indirectly by buying stocks or funds that concentrate in the agricultural supply chain, but you cannot assume that land is owned by companies that buy, process and sell food commodities, said McNairy. “Think about agricultural inputs as part of the manufacturing process,” he said.
The companies that keep the supply chain moving generally fall under the “agri-business” category, but investors have significant flexibility to pick and choose stocks from its different subsectors. For example, at the start of the supply chain are companies like Dow (DOW), Nutrien (NTR) and CF Industries (CF), which provide seeds, chemicals and fertilizers to improve crop yields and water efficiency. Further down the chain are companies like Deere (DE) that manufacture farming equipment needed for harvesting, as well as transportation and storage companies like Archer-Daniels-Midland (ADM) that get food from farms to supermarkets.
As with other real estate categories, you can join like-minded investors to jointly own farmland through online farmland crowdfunding platforms, such as AcreTrader, FarmFundr and FarmTogether. AcreTrader, for example, showcases available investments and includes key information about the types of crops that will support investors’ returns. It’s smart, said Malloy, to monitor the offerings and become conversant in the types of terms and minimum investments before opening a conversation on an online platform about an intriguing opportunity.
Farmland is a good option to explore once you are confidently navigating the main pillars of investing — equities and debt — said McNairy. And it’s precisely for the faint of heart, added Malloy.
“Farmland is boring,” he said. “It’s about slow and steady compounding.”