For an asset class that’s worth around $3 trillion in the United States, farmland as an investment isn’t talked about much. It has historically been a difficult market to access, and owning and operating a farm isn’t exactly in everyone’s wheelhouse.

But it’s also an extremely attractive asset, and these barriers don’t have to hold you back. With a little knowledge and the right tools, anyone can reap the benefits of farmland, from the individual farm buyer to the diversification-minded investor.

This guide is for anyone interested in buying or owning farmland. While it’s generally oriented towards an investor pursuing a passive income source, this resource will be useful for anyone learning how to value, make money from, or buy or sell farmland.

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Contents

I. Why Invest in Farmland?

II. How to Invest in Farmland

I. Why Invest in Farmland?

Favorable Supply and Demand

As the source of the world’s food supply, farmland is intrinsic to human life, and that’s not changing anytime soon. Global population and agricultural conditions suggest that demand for arable land is only going to grow in the future.

Growing Demand on Global Food Supply

There are already a lot of people to feed—about 7.9 billion—and that number is increasing all the time. By 2050, a key target year in many studies of population growth and food demand, the global population is expected to reach about 9.7 billion.

Economic development, especially in emerging countries, is another factor in global demand for food. While global economic health has taken a significant hit as a result of COVID-19, the World Bank expects GDPs to continue to rise at a rate of around 4% per year.

Typically, rising incomes in developing markets are accompanied by higher demand for animal proteins like beef, pork, and chicken. More demand for meat means more demand for grain.

Cereal crops like corn, rice, and wheat form the foundation of human diets on their own, but they are also key to meat production. For example, it takes roughly six pounds of grain to produce one pound of beef. And every bit of that grain is grown on a farm.





Our growing numbers as well as rising global incomes together mean that our need for high-performing farmland is more acute than ever and will remain so. The Food and Agriculture Organization (FAO) of the United Nations estimates that global food production needs to increase by about 70% by 2050 to keep up with expected growth.

Shrinking Supply of Arable Land

Clearly, arable land is going to be called on to do a lot of heavy lifting in the next few decades.

That’s especially true in the U.S., where we have some of the best arable land in the world. The U.S. contains over 900 million acres of farmland, about 250 million of which produce the cereal crops that are so key to global diets. Last year, U.S. farms produced about 4.2 tons of coarse grain per acre, which is more than a ton more than the next highest-producing country (Argentina) and over double the global average.

Part of the reason is that U.S. farmers have excellent access to advanced farming technologies. Another is the relatively temperate climate across much of the country. But the biggest driver of U.S. agricultural productivity, or productivity anywhere, is excellent soil.

Soil isn’t the same thing as dirt. It’s a delicate living ecosystem, and we are losing it too quickly for comfort.

In 2015, news outlets around the world reported on a University of Sheffield study finding that the planet had lost a third of its arable land in about 40 years. The U.S. mirrors that trend. A 2020 study by the American Farmland Trust calculated that we lose about 2.9 acres per minute.

Much of this land is lost to urban and suburban development. Between 1992 and 2012, more than half of urban and suburban growth happened on agricultural land, converting about 31 million acres to developed uses.

Source: American Farmland Trust

Other factors depleting our farmland supply are erosion and agricultural overuse. These can be prevented, and in many cases reversed, through skillful management. Soil lost as a result of development, however, can’t be recovered.

“It is critical to balance the growing demands for energy, housing, transportation, and water to ensure our best agricultural land remains available for food and other crop production.” —Farms Under Threat, American Farmland Trust (2020)

For all these reasons and many more (including environmental health, farmer livelihoods, and rural cultures, to name a few), it is critical that we preserve our farmland and use it skilfully.

One way to do that is through responsible investment. The laws of supply and demand point to a future in which farmland is not only a desirable investment, but a necessary one.

Landowners Make Money From Farmland

Farmland has also long been recognized as an attractive investment choice in its own right.

That’s because its ability to produce valuable commodities means it generates income every year. There are myriad arrangements by which landowners earn money from their farm investments. Here are the most common, ranging from the most hands-on management structure to a more passive arrangements:

Owner-Operator

In this scenario, the person who owns the land also farms it. Thus, they reap the total annual yield and are also exposed to losses during bad years. As the owner-operator is responsible for running the farming business, this arrangement is the opposite of a passive investment. Many owner-operators have grown up in farming families and have extensive experience and possibly even formal education in agribusiness.

Custom Farming

This is an arrangement in which a landowner pays someone a fixed rate to operate their land. The owner remains responsible for all the costs of operation—only one of which is payment for the hired operator—but also keeps the totality of profits. The operator commonly provides their own equipment.

Custom farming can be a lucrative arrangement, with returns approaching 9-10% of land value annually, but it requires some risk exposure in terms of good or bad harvests and commodity price fluctuations. A landowner will need a bit of agribusiness know-how to adequately take charge of a farm in this scenario.

Crop Share

Crop sharing is an agreement in which both the farmer and the landowner receive a percentage of farm profits; they sometimes also share a percentage of total costs. Different agricultural regions have different norms for crop share arrangements. Crop sharing might generally bring investors returns of 5-6% of the total land value.

Crop sharing can often involve lower expenses for landowner but may entail some risk. The operator could well have other business priorities or land of their own, but any number of factors could detract from maximizing yields within the crop share. Notably, the landowner is still exposed to commodity markets and crop risks.

Cash Rent/Lease

In this scenario, a farm operator pays a fixed cash rent per acre to the landowner. The farmer remains responsible for the entirety of the operation, and rent is usually prepaid ahead of the planting season, reducing the risk to the landowner of a bad year or price fluctuation. Depending on the region and crop, rent could be negotiated anywhere from $150 to $1,050 per acre. This arrangement definitively carries the least risk for the landowner.

The scenario you choose will depend on your agricultural knowledge level and how closely you want to be involved in the day-to-day operations of your farm. Throughout this guide, unless otherwise specified, we focus on the cash rent model because it is the most common arrangement used in AcreTrader's investment opportunities.

Professional Investors are Buying Farmland

You may have noticed farmland investment making headlines recently, but this isn't a particularly new trend. Large organizations like teachers’ pensions, churches, and others with a tendency to invest conservatively have been buying land as an investment for decades. Rather than your typical "safe" investments, like bonds or CDs, these institutions have seen farmland as a store of value with the potential for higher returns.

In recent years, we’ve seen more funds and big-name investors getting interested. That increased media attention may create the impression that major investors are “buying up” vast tracts of the country.

In truth, that’s a bit of a misconception; only a fraction of U.S. farmland is owned by big institutions. Of all U.S. farmland (roughly 900 million acres), only 6.5% is “non-family farms,” a classification composed of several types of entities, including larger farming business and institutional investors.

Well above half of all farmland in the U.S. is still owner-operated, and much of the remainder is rented from individual owners. There are myriad arrangements of farmland ownership and operation, and in an asset class worth nearly $3 trillion, there’s still plenty of room for investors of all stripes.

As farmland gains visibility, investors will continue to be drawn to its historically strong reputation of offering high returns, stability, and portfolio diversification.

High Historical Returns

Farmland has generated returns of 11-12% per year for the past 30 years, according to the NCREIF index (which is as long as they’ve been recorded). Compare these with the returns of other common asset classes, and you’ll see that farmland returns have consistently been positive and rising.

Line graph comparing returns of major asset classes like stocks, bonds, commercial real estate, gold and farmland.

(1) Supplemental information. Please see additional disclosures for further information. Source: NCREIF, Bloomberg, Bankrate, NYU Stern School of Business, Federal Reserve Bank of St. Louis and AcreTrader calculations. All returns are estimates and assume reinvestment of dividends. Updated data published on 12/20/2021 and is for the period 12/31/1990 - 12/31/2020. Prior to this update, the data reflected the period 12/31/1990 - 12/31/2018.

One reason for this is that land tends to appreciate over time. Another is that farmland generates annual income from growing crops. The returns you see in this chart comprise two factors: annual yield plus appreciation.

Modeling Farmland Returns

Yield is simply yearly income you earn from the farm operation. In other words, an operator makes money from growing a crop every year and selling it. Annual yield numbers see some variability based on the type of crop grown on the land as well as shifts in commodity prices.

For a landowner who doesn’t operate the farm themselves, yield typically comes in the form of rent. Thus, they’re shielded somewhat from that variability. Cash rent is a very common arrangement among farmland operators and landowners—more than 40% of U.S. farmland is leased.

When calculating expected returns for the farm offerings on the AcreTrader platform, we generally estimate the annual income component of returns to range anywhere from 2 and 10 percent, depending on the offering structure, crop type, and local rental markets.

Farmland has also generally appreciated in value year over year. According to data collected by the USDA, the Compound Annual Growth Rate (CAGR) of farmland for the past 50 years has been 5.9%.

Internal Rate of Return, or IRR, is a common measure of investment returns, especially in real estate. When we calculate the expected IRR of a farm offering on our platform, we combine the average appreciation of 5.9% with an informed estimate of average annual yield, or capitalization rate. As an example, a 3% yield is a conservative estimate for a typical row crop farm; that gives us a return rate of 8.9% per year.

That’s a return that rivals many other common asset classes, especially considering farmland’s comparative stability.

Portfolio Diversification

Historically Impressive Risk/Reward Investment

Sharpe ratios are a way of comparing the return potential of investments while taking into account their relative risk. Farmland’s Sharpe ratio of 0.86, according to a 40-year calculation by Hancock—as compared to large-cap equities (0.39), long-term government bonds (0.47), or even commercial real estate (0.80)—shows the highest returns with the least relative risk.

Table comparing Sharpe ratios of common investments

Non-correlation

Additionally, farmland tends not to exhibit much correlation with other asset classes. For example, from 1991 to 2017, the statistical correlation between farmland and the S&P 500 was -0.03. Basically, there’s no evidence that farmland and stock market prices influence each other whatsoever.

This isn’t true of financial assets like REITs and agricultural land funds. While these do give investors exposure to the asset class of farmland, they tend to be more prone to market fluctuations because once farmland is securitized and turned into a fund, the value of the fund is somewhat divorced from the underlying asset.

Low Volatility

Limited volatility is one of the features investors like most about farmland, because it can help stabilize a portfolio during periods of recession. While financial assets can oscillate between big returns and big losses, farmland hasn’t shown those swings. In fact, farmland returns have been positive every year for the past 30 years, swinging at most between larger and smaller positive returns.

Inflation Hedging

Finally, many investors see farmland as a viable hedge against inflation. Farmland values have historically tracked inflation very closely, showing a 70% and 80% correlation with the Consumer Price Index (CPI) and Producer Price Index (PPI) respectively. No other asset class has tracked as closely to these two primary measures of inflation as farmland.

For a deeper analysis of farmland’s performance in the midst of adverse economic conditions, take a look at this investigation of a Nebraska farmland bear market in the 1980s.

Ability to Mitigate Risk

In addition to farmland’s general stability and resilience, some specific features of farmland ownership allow for increased risk mitigation.

For investors looking to own farmland but not work it themselves, it’s all about intelligent management. Owning multiple farms in different geographic locations, diversifying by crop type, avoiding debt in most transactions, and holding assets for extended periods to allow for appreciation are a few tactics that keep farmland investment risk in check.

We’ll discuss these strategies in more depth in the Farm Income section below, but it’s worth noting that many of these advantages are built into the AcreTrader model. We help investors gain access to farmland without having to directly manage most of the technical aspects themselves.

II. How to Invest in Farmland

So let’s say you’ve made up your mind. You’ve decided that farmland is the right investment for you, and you’re ready to start exploring the market.

Whether you’re looking to purchase and operate a farm yourself or own land as a more passive investment, you’ll need a basic grasp of how to find, value, and select a farm to invest in.

Sourcing Farmland

The first step, of course, is finding farms for sale. Frankly, that’s easier said than done. The agricultural land market is relatively narrow and largely offline; many farms never go to auction or get placed in a centralized listing service. Quality land is much more likely to change hands via private transactions powered by regional networks of farmers, landowners, brokers, agents, funds, and institutions.





Here at AcreTrader, for example, we make hundreds of phone calls every week, tapping all of the resources listed above and more. Many of the farms we offer on our platform originate with individual farmers who reach out about farms in their area or about selling their own land.

Put simply: to find land to buy, you need to search on a local level. An experienced broker can help you extend your network and your access to quality deals.

Evaluating Farmland

Once you locate possible investment opportunities, the next step is to evaluate them.

One appealing aspect of farmland is the advantage you gain when you know the asset well. Whereas stocks are surrounded by data points and metrics available to the general public, farmland’s obscurity can actually be a strength for those who understand its ins and outs.

If that’s not you (yet), an experienced team like AcreTrader’s can help you learn about and select investment-grade parcels.

Start With Regional Knowledge

Regional knowledge is the foundation of that understanding. What constitutes a high-quality farm depends on its agricultural region. In the Midwest, for example, soil productivity, drainage, and price per tillable acre will come into play, whereas in the Mississippi River Delta, irrigation and crop types are larger concerns. And on the West Coast, where many permanent crops like almonds, apples, and pistachios are grown, water access is all-important. Depleted groundwater and extended drought can cause issues on farms that lack strong water rights.

Farm Valuation Criteria

From the basis of a working knowledge of quality ground in the area where you’re searching, you can start to examine more specific details that are more specific to the farm itself.

Three of the primary points to considering when valuing agricultural land are:

1. Farm income: Income is based on consistent crop yields. You’ll want to look at how much crop a farm can grow, how steady that amount stays over time, and how reliable market access and prices are in the area.

Farm income can be affected by many different factors, including soil quality, water access, topographical features, historical yields, the local tenant market, and proximity to highways and other shipping routes.

For investors, income depends on the expected rental rate for the farm. To find rent information in the area, you often have to rely on trusted advisors with a local presence like brokers, farm managers, or farmers—folks who have a good pulse on the market.

2. Local land markets: This is vital information for an investment in farmland. Strong land markets have enough buyers and sellers to support healthy prices and healthy trade. You want to be sure the market will support the sale of the farm down the road at a decent price.

To assess the land market in an area, look at recent sales, hone in on a few specific comparables, and examine the demographics of landowners in the area.

3. Other assets and income: This category might include structures like houses and outbuildings, infrastructure like irrigation systems, or non-farming sources of income like hunting leases.

Sometimes these features can cause unwanted complications, but the opportunity for extra income may be a worthwhile addition to your investment.

Farm Valuation Process

Here at AcreTrader, we choose farms using a funnel process, winnowing down a broad array of leads to a robust selection of deals we feel confident will appeal to our investor base.

Depending on your intentions for the farm, your criteria may differ from ours, but in any case, it helps to start out knowing what you’re looking for. Then it becomes a simple process of elimination.

Our selection process occurs in three phases:

1. “Sanity check”: When we first encounter a farm, we make sure it fits our broad requirements in terms of price, size, and freedom from major problems. This is where we ask the question, “Does this fit the basic financial profile of farms we’re looking for?”

2. Documentation and verification: Once we’ve found a farm that looks appealing, we start assembling hard data, including soil and slope maps from multiple sources, financial modeling, yield history, and perform several iterations of proprietary software analysis.

3. Ground check: If a farm holds up to the scrutiny of the second phase, we eventually visit it in person, not only to examine the land itself, but to get a sense of the surrounding area. Some of the context we establish here are local land and tenant markets, as well as comparable sales.

AcreTrader’s diligence process rules out everything but a tiny fraction of the total leads that come our way. Besides being a reliable way to identify quality ground, systematic evaluation also helps us settle on a fair purchase price.

AcreTrader's 5 step diligence process and the points of evaluation in each step

How Do Farms Generate Income?

Beyond the features of the land itself, you’ll need to understand how your land will generate income.

The first section of this article covered the two ways farmland makes money: yield plus appreciation. Under normal conditions, appreciation happens gradually over time without the landowner doing anything. Yield—namely, rent from a farmer or a portion of crop sales—is what makes money year over year, and the way it’s generated depends on crop type.

Most U.S. cropland falls into one of two categories: row crops and permanent crops. These differ significantly in their management and financial structures.

Row Crops

Row crops are so called because they’re sown in rows so as to be accessible by machinery. Some of the most prominent U.S. row crops are cereal grains like rice, corn, and wheat, soybeans, and cotton.

The income model from row crops is pretty simple: a farmer plants a new crop every year, then harvests and sells it at a given price per unit in the same year. Subtract the farmer’s expenses for the year from total crop sales and you have the operator’s yield. For investors, cash flow comes from cash rent, paid by the farmer out of their income. Rent is negotiated upfront as part of the lease and is usually paid in two installments, one prior to planting and another during growing season each year, so investors are insulated somewhat from the risk of a bad crop or other unforeseen event.

Finally, the land appreciates at a base rate, and because planting happens anew each year, there’s no depreciation.





Permanent Crops

These are crops that grow on stationary trees or vines and are harvested every year. Fruit and nut trees like apples, almonds, and pistachios are examples of major permanent crops here in the U.S.

Income from permanent crops can be a little more complex than row crops. Orchards and vineyards require a higher amount of upfront investment capital to establish because trees or vines have to be planted, which is both more expensive and time-intensive than simply planting seeds. There can also be a longer time investment as you wait for crops to mature.

Once plants reach full productivity, permanent crops bring comparatively high returns. For this reason, investors’ cash flows are based on actual yields rather than on rent per acre. Because these crops persist from year to year, there is exposure to depreciation involved—not of the land, but of the trees or vines.

Because permanent crops depend more heavily on the skill and experience of the operator and the quality of the farming operation, we tend to vet our permanent crop deal sponsors as stringently as the land on these deals.

Chart comparing row crops and permanent crops

Whichever type of farm you invest in, you’ll need a firm understanding of the economics of the crop itself so that you know what to expect regarding returns and risks. Strict underwriting is always paramount to ensure the land you’re investing in is able to consistently produce a yield.

Other Passive Income Sources from Farmland

It’s worth noting that there are a few other ways to make passive income from land you own which harness other aspects of farmland aside from its growing capacity. These include recreational leases, selling or leasing water and mineral rights, and leasing extra space for things like information towers, billboards, windmills, and solar panels.

There are special considerations and/or legal complexities around many of these, so it’s advisable to contract them with the help of an attorney.

AcreTrader models income solely on direct yield, but we see these residual income sources as added bonuses with the potential to maximize return for our investors.

Buying Farmland

By now, you’ve learned a lot about an unfamiliar asset class. The next and most important step is to actually own some farmland.

Some people are looking to buy land directly, whether to farm themselves, contract their own operator, or use in some other way. The vast majority of farmland transactions are still direct purchases by individuals. If you fall into this category, it may be helpful to work with a land brokerage like AcrePro.

If you don’t, there are several ways to buy farmland out there that make it possible for investors to capture the benefits of farmland ownership without having to take care of every aspect themselves. Some of the most prominent are:

Private equity funds: Also called Agricultural Land Funds or farm funds, these private equity pools offer institutional alternative asset investors the ability to invest in land at scale. Farmland has attracted a large amount of investment in private equity in recent years, but this approach often requires high investment minimums.

REITs: Real Estate Investment Trusts (REITs) are a well-established asset class, but only in the past decade or so have agricultural REITs been an investing option. Also known as agriculture stocks, these are publicly traded companies that typically own and operate real estate using debt to pay out dividends. REITs undoubtedly make farmland accessible to the average investor, but they also bring exposure to volatility as they are traded as public stocks.

Equity crowdfunding: Crowdfunding is funding a project by pooling relatively small amounts of capital from a relatively large crowd (often facilitated by an online platform specifically designed for the process). Equity crowdfunding raises money by offering individual investors shares in the venture. In the context of real estate, like farmland, investors buy proportionate shares in a specific property.

AcreTrader uses some aspects of crowdfunding to allow investors to purchase shares in an LLC that then purchases a parcel of land. In other cases, we provide a platform through which investors can purchase units in a permanent crop operation.

For investors, our platform helps eliminate some of the friction involved with farmland ownership by allowing investors to purchase shares in farmland quickly and easily online.

Diversification Within Your Farmland Portfolio

Once they’ve invested in a farm and become familiar with the proces, many investors start to think about diversifying within the asset class. This means buying different types of land in different regions, which can help an investor balance risks by owning farms with different climate, crops, weather, and operators.

Keep in mind, there is a point at which diversification can take you too far afield, such as into states that are less ideal for crop production. The idea here is to choose a variety of quality farms, not necessarily different farms just for difference’s sake.

In addition to sourcing farms across the U.S., AcreTrader tends to focus on optionality, or investments that offer flexibility. Often, this means land that can grow more than one crop, so if one is performing poorly in current market or weather conditions, the farm can be shifted to grow something else. This kind of adaptability is one of the biggest advantages of only investing in top-tier farmland.

Selling Farmland

Once you’ve purchased a farm or shares in a farm, you may plan to hold onto them for a period of time in order to capture both yearly income and any appreciation in the value of the land. Once that time has passed, you may want to sell the farm.

A reasonable hold period before selling farmland, generally speaking, is long enough to realize gains from appreciation. AcreTrader’s goal is to sell when it will realize the greatest benefit to our investors.

The timing often depends on the farm type. For row crops, we estimate 5-10 years will be enough time to capture an appreciable increase in land values. Permanent crops take a little longer—10-15 years—because they take more time to generate the higher annual returns that will balance out depreciation of trees or vines. Finally, in a value-add farm, in which investors fund a specific improvement project, the timeline may be a little shorter for realizing appreciation.

Ultimately, when to sell will depend on the local market and what opportunities emerge. If you are a current farmland owner looking to sell your property, visit our series on selling a farm.

Conclusion

Farmland is an asset that we all depend on. In a world that’s changing quickly, that solidity can not only stabilize your investment portfolio, but contribute to everyone’s future wellbeing. In many ways, it’s a world unto itself, requiring expertise to transact and manage profitably. But its particularities are also what make it a rewarding investment.

AcreTrader’s aim is to bring transparency to the process of investing in farmland so that more people have access to its many benefits. We want to equip investors, landowners, prospective buyers, farmers—anyone with a stake in our nation’s agricultural land—with the knowledge, tools, and support they need to confidently navigate the world of farmland. If you’re ready to explore investing in farmland with AcreTrader, view our current offerings here.

Megan
Megan Blankenship

Content and Community Manager

Megan Blankenship grew up in the rural Arkansas Ozarks in a family of small farmers. Before joining AcreTrader, she worked in advertising and communications for top-tier agriculture clients. She loves writing about land, farming, and the people who care about them.