You Reap What you Sow: Farmland Investment

Inflation-Proof

With all the uncertainty plaguing the investment market right now, investors are looking for a strategy to diversify their portfolios.  You may have come across articles in recent months regarding the world’s fifth wealthiest person, Bill Gates, investing in farmland and in the process becoming the largest owner of acres in the United States.  However, it is not just Gates that has pivoted in this direction, there is a large growth in investment from global corporations, pension funds, and even crowd sourced organizations that are moving toward farmland as a wealth building opportunity.  Here we are going to examine the pros and cons in this investment strategy.  Farmland represents an inflation-proof investment that has shown consistent growth since the data has been tracked by NCREIF (National Council of Real Estate Investment Fiduciaries) starting in 1992.  The reason that investment in farmland is inflation-proof is simple: more land isn’t being created and people will always need to eat.  Combine this with the fact that the global population is expected to peak in 2050 at 9.7 billion people means a lot more food will be needed to be produced.

Income Streams

There are two streams of income when it comes to farmland, neither of which are get-rich-quick schemes but overtime have shown consistent growth.  The passive income source is simply from the sale of the crops produced on the land.  It is important to understand the distinction between crops as there are two categories which differ in both their potential yield growth as well as risk.  Row crops are annual crops, these include corn, squash, soybeans and they offer lower annual yields, limited growth, but they are also less volatile.  Permanent crops, such as pistachios, almonds, grapes, berries and avocados offer a higher profitability opportunity however they are more susceptible to market volatility and an investor would assume more risk.  The second source of return is simply the value of the farmland itself which follows a similar trend to that of overall property value trends.  While the first stream of return, the crop itself, is consistent, it’d be wise to monitor the rising interest rates and the flattening of property values that we’re seeing in the market right now.  As rates go up, values go down and this is part of the risk associated with the investment.  FarmTogether, a crowd sourced farmland investing start-up, commented on what makes farmland an increasingly attractive direction, “The increasing scarcity of farmland and its lack of correlation with other asset classes make it an exceptionally strong diversification tool for virtually any portfolio.  This has driven institutions to significantly increase their investments in farmland and over the last 30 years.”

Diversify

According to NCREIF, between the years of 1992 and 2020, farmland offered 11.01% return outperforming U.S. Equities (8%), US Government Bonds (5.46%), US Real Estate (8.66%) and US REITs (9.86%), it is no wonder why corporations have taken notice of this investment that acts as a hedge against adverse market conditions.  While it is important to monitor interest rates, property values, and the commodity market before considering making the investment, farmland represents one of the more stable and portfolio diversifying opportunities on the market that has shown consistent and stable growth over the course of the last 30 years.