Farmland isn't high on the list of sectors that come to mind when considering investing, but farms provide essential services. Not only do they supply us with food, but they also offer new opportunities for those who know where to look.
This article will discuss how farms fit into public markets and name seven ways to invest in this industry.
Why invest in farmland?
Why invest in farmland? While you probably won't find owning or operating a farm appealing, you can invest in farmland through an array of assets and earn returns in the form of dividends, capital appreciation, rent and more. Here are a few reasons to consider investing in farmland:
- Variety of opportunities: Wondering the best way to invest in farmland? "Best" can vary depending on your goals and risk tolerance, but you can make farmland investments through stocks, ETFs, REITs, futures and even real estate crowdsourcing.
- Diversification from traditional assets: A farm investment returned about 11% annually over the preceding 25 years, according to a 2021 analysis, which beats the S&P 500 over the same timeframe. Farms produce essential commodities, which typically provide some protection from inflation.
- Sources of returns: With so many asset classes connected to farmland, you can choose which type of exposure you want. Stocks and ETFs can offer capital returns, REITs pay dividends and crowdfunding platforms can provide income through rent and equity.
Understanding farmland investments
Farms are crucial because they grow many precious commodities we use daily for food, drinks and clothing. In addition, farmland is a valuable asset since land is scarce, and farms provide a service that everyone needs for survival in one way or another.
Farms operate by raising various crops and animals or focusing on a single commodity like wheat, corn or cotton. Farming is often considered the oldest industry in human history, with origins dating back to 11,000 B.C.
Today, farming companies reside in the agriculture sector, and advances in equipment and technology have made the process more efficient than ever. But farming is still hard work, and maintaining the food supply requires the involvement of many different organizations, including local, state and federal government agencies.
Factors influencing farmland values
Like most real estate types, many factors influence farmland value, but one stands out — location, location, location. Farms need welcoming weather and quality soil, meaning many areas of the country cannot farm the fruits and veggies we eat daily. You can't turn on the heat when it's cold and warm up the crops; you have to grow them in an area where the seasons line up with the harvest schedule.
The government also influences farmland value. Farmers must stay on top of regulation and compliance issues to keep their businesses operational. You must pass inspections and acquire the proper permittance to sell crops or livestock (or food derived from them). U.S. farmers must follow a list of rules and regulations to get started, which you can find on the Environmental Protection Agency (EPA) website.
Due diligence before investing
To buy land for a farm, you'll need to understand market dynamics from a real estate and agricultural lens. You'll need to find valuable land in a market that supports the agricultural products you wish to sell. Is the local population growing or shrinking? How many different crops can your potential farm support?
Investors who want farmland exposure need to ask similar questions as well. If you're investing in agricultural stocks, you need to research commodity prices, harvest season predictions and the general state of the economy (people tend not to care if their food is locally sourced or environmentally friendly if their wallets are light).
Investment strategies for farmland
Like any investment, your strategy for farmland depends on your timeline and goals as an investor. If you're looking for a short-term gain from a boost in commodity prices, going in on real estate doesn't make much sense.
7 ways to invest in farmland
Now, let's get started with the specifics of farmland investing. Fortunately, several ways exist to access farms and the farmland sector without buying one. Not only do plenty of traditional securities provide exposure to farms and land-owning companies, but alternative investment options exist as well. Here are seven different ways for investors to buy the farm (literally).
Farming stocks
Many farms that grow our crops, grow our livestock and provide food to our tables every evening are publicly traded companies with stocks on major exchanges. You can choose which type of agricultural stocks to invest in based on their ownership or the type of crop, livestock or commodity they produce.
For example, Cal-Maine Foods Inc. NASDAQ: CALM cultivates soft-shell eggs through its farms and hatcheries and sells them to grocery stores, wholesale clubs and other distributors.
Want to know how to invest in Canadian farmland? Look at Nutrien Ltd. NYSE: NTR, a Saskatoon-based plant nutrient company.
Looking for new startups? You could consider Kalera Public Co. NASDAQ: KAL, a small-cap indoor farming company building proprietary hydroponic systems.
Stocks that make farming equipment and products
There's an old saying about the gold rush: The real money wasn't in looking for gold but in selling shovels to those trying to find it.
While that's not a perfect analogy in this instance, investment opportunities also exist in the companies producing farm equipment and supplies.
Some of the biggest companies in the farm equipment industry are Tractor Supply Co. NASDAQ: TSCO, which sells everything from heavy equipment to boots and hats, land and lawncare giant Deere and Co. NYSE: DE and fertilizer producer Scott's Miracle-Gro Co. NYSE: SMG.
Commodities through futures contracts
If you want to avoid exposure to farms but instead the products they produce, the commodities futures market may hold what you're looking for. Of course, commodities trading is an advanced strategy since futures contracts require a specific account.
Still, it allows investors to bet on the price of agricultural goods like wheat, corn, livestock and more without actually buying stock in a farming company. Just always be sure to consider the risks and rewards of futures trading before engaging.
Agricultural ETFs
Want to know how to invest in farmland ETFs? It's easy — you'll need a brokerage account and enough cash to buy a share of your ideal fund. Agricultural ETFs are usually structured in one of two ways: through commodities contracts or farming stocks.
The largest commodities-based farmland ETF is the Invesco DB Agriculture Fund NYSE: DBA, and the biggest ETF holding farm (and farm equipment) stocks is the VanEck Agribusiness ETF NYSE: MOO. In addition, farmland ETFs often pay dividends, giving investors two different ways to profit. Investors can also turn to mutual funds if they want assets in their 401(k) accounts.
Companies like CrowdStreet and Fundrise allow retail investors to purchase a portion of a house, apartment building or other residential or commercial property and earn income through appreciation and rental payments. Many of these platforms are open to non-accredited investors, and you can make a minimum investment of just a few hundred dollars. So naturally, crowdsourcing has become a way to invest in physical farms and farmland without owning land or working the fields.
If crowdsourcing sounds ideal for your farmland investing, you'll have a few different platforms to consider. For non-accredited investors, Steward and Harvest Returns are two options to consider. Steward specializes in debt-based deals; investors can get involved for as little as $100. Harvest Returns has equity and debt opportunities, but you'll need a $10,000 minimum to make your initial investment.
Your options increase if you fall into the accredited or institutional investor camp. Some of the more popular platforms for accredited investors include:
- FarmTogether: Buy shares in vineyards, orchards and other forms of sustainable farmland. Over $170 million worth of deals have been closed on FarmTogether.
- AcreTrader: Offering various investment opportunities in farms all across the United States. Investments typically last three to five years, and minimums start around $15,000.
- FarmFundr: A unique crowdsourcing platform that allows investors to earn income from the farm's harvest and rent or property appreciation. The minimum investment starts at around $10,000.
Farmland REITs
Real estate investment trusts (REITs) invest in different property types. One of the benefits of investing in REITs is that by law, 90% of taxable profits must be returned to shareholders via dividends. While most REITs invest in commercial or residential real estate, a few own and lease farmland across the United States.
One of the largest farmland REITs is Gladstone Land Corp. NASDAQ: LAND, which has a market cap of nearly $600 million and owns farms in 15 states. Farmland Partners Inc. NYSE: FPI has a similar market cap and focuses on farms producing commodities like wheat, soybeans, corn and rice.
Support local farms
This investment might not put any cash in your pocket, but supporting local farms helps keep food sources diverse and provides stability (and jobs!) in your towns and neighborhoods.
Supporting local farms means the food on your table doesn't need to travel across the country to reach your kitchen, which reduces environmental strain and gives you fresher and healthier eating choices. Besides, ears of corn just taste better after you peel and husk them yourself.
Pros and cons of investing in farmland
What are the benefits and drawbacks of investing in farmland? Here are a few to consider before putting any capital at risk.
Pros
The benefits of farmland investment include:
- Inflation hedge: Farmland has historically been correlated to CPI, allowing investors to keep up with inflation while diversifying their portfolios.
- Many ways to get paid: Dividends, capital appreciation, property appreciation and rent from leasees are all on the table when considering farmland investments. Some crowdfunding platforms even allow investors to reap harvest profits on the farms they buy into.
- Different assets: Farmland investors can choose stocks, ETFs, exchange-traded notes (ETNs), commodities futures contracts, REITs and crowdfunded properties. Farming companies and farmland can satisfy a wide range of investment goals.
Cons
On the other hand, the downsides include:
- Expensive funds: The ETFs attached to the agriculture sector have high expense ratios compared to other thematic funds, and many lack liquidity, increasing bid/ask spreads.
- Weather risks: Most of the stocks in your portfolio don't need to worry about a long winter, natural disasters or a lack of rainfall. However, investors in farmland have to consider the risks weather poses to the necessary crops and land.
- Beholden to commodities: Farmers depend on stable commodity prices to maintain their fields and profitably sell their crops and livestock. Volatility in commodities can be hazardous to farm profits.
Financing farmland investments
Your financing options generally come down to the complexity of your farmland investments. If you want to invest in farmland stocks, commodities futures or REITs, you just need capital in a brokerage account. Investing in farmland through a crowdsourcing platform often requires accreditation, but everyday investors do have a few options through companies like Harvest Returns.
If you want to invest in farmland directly, you'll need to consider the costs of not only land and equipment but the business structure of the farm as well.
Are you purchasing an existing farm or converting open land into one? If you buy a farm, will the current tenant remain in your employ, or will you search for a new operator? The more work you can do upfront, the greater your long-term returns will be, but not everyone has the time and know-how to spin up a successful farming business.
Tax considerations for farmland investors
Investing in public farmland companies means simple taxes; you'll pay capital gains rates on any securities held for over one year and income rate for any period is shorter than one year. If you invest through a crowdsourcing platform, you'll receive a K-1.
Direct farm owners must fill out IRS Form 4835 for farm rental income and expenses. Farming is hard work and often thankless, so the government has a number of tax breaks and deductions for owners. Farmers can often take fuel tax Credits, conservation credits, renewable energy credits and other state-specific credits (like Minnesota’s Beginner Farmer Tax Credit).
Future trends in farmland investments
Climate change looms large over the farming industry. Changes in temperature force farmers to alter their seasonal schedules and remodel their practices.
While some farmers enjoy longer growing seasons as temperatures rise, climate tailwinds include irrigation problems, pollution concerns, wildfire risks and pollination mismatches. Farmers must plan to mitigate risk.
Farms do have some headwinds coming down the pike, too. The time and resources required to operate a farm are significant. Still, artificial intelligence and automation can make these businesses vastly more efficient despite how you may picture a traditional farm. Robotics makes harvesting crops safer, and AI can help farmers capture more data about soil quality, weather patterns and market trends for individual crops.
Future of farmland
Farming is a tricky business. The labor is complex, and the hours are long, but farming is necessary, and the future might bring a less strenuous lifestyle for those involved. Believe it or not, advances in artificial intelligence and robotics can make a massive difference in the life of a farmer.
Farmland is a unique asset that provides a form of portfolio diversity disconnected from traditional asset classes like stocks, bonds and real estate. In fact, according to FarmTogether, farmland is more correlated with the Consumer Price Index (CPI) than the S&P 500 or 10-year Treasury, providing a hedge against inflation.
Gain exposure to farmland from a variety of sources
Farmland investments can span a range of asset classes and risk levels. You won't need to plant seeds, till fields or harvest crops to benefit from the farming industry, although owning a farm offers plenty of tax breaks if you think you're into that lifestyle.
But for most of us, investing in farmland is about diversifying our portfolios away from the lockstep movement of traditional stocks and bonds.
It's even better to beat the S&P 500 along the way. However, before investing in farmland, consider your long-term plans and how this industry could fit into them. Farming is a need that won't go away as the world population expands and land grows more scarce.
FAQs
Want to know more about how to invest in farmland? Here are a few commonly asked questions.
Can you invest in farmland?
Yes, you can invest through publicly traded farms, farm equipment and supply producers, agricultural ETFs, commodities futures contracts, REITs or crowdfunded real estate platforms.
Which farmland stock is best?
Farmland stocks cover a range of companies, so the best asset class depends on the individual investors' risk tolerance and goals. Some investors prefer ETFs and REITs, while others may prefer large farms and equipment producers.
Is there an ETF for farmland?
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