How to Invest in Farmland: A Guide

As farmland becomes a more widely recognized asset class, you may be wondering, “How do I get involved?”

This guide provides an overview of three basic steps to take you from beginner to a more savvy farmland investor. Read on to learn how you can put farmland to work in your investment portfolio.

Contents

• Get educated: knowledge you’ll need going in
• Choose your method: an overview of your options for investing
• Hone your strategy: considerations for your long term farmland investing strategy

Get Educated

How Does Farmland Fit Into Your Investment Goals?

Before you start buying, take a moment to consider your goals and needs.

Farmland is typically treated as a long term, passive investment that generates a modest but steady return from leasing or sharing in the profits of a farm. A relatively lengthy hold period allows you to realize gains from land appreciation.

But there’s some flexibility within that model depending on your needs for liquidity, diversification, and risk insulation. Some investors may even want to buy a farm directly and start farming themselves! We’ll cover all your options a few sections down.

How to Find Farmland Investment Opportunities

Finding farmland for sale is all about knowing local markets, which unfortunately remain relatively opaque despite technological advances in other areas of the ag industry.

Not widely marketed or listed, farmland sales are informal compared to other types of real estate. Quality land is much more likely to change hands via private transactions powered by regional networks. Those networks might include:

• farmers
• landowners
• brokers
• agents
• funds
• institutions
• auctions
• listings on a broad array of platforms

For context, here at AcreTrader, we make hundreds of phone calls every week, tapping all of the resources listed above and more.

As farmland gradually becomes a more common investment, lots of tools and companies are cropping up that can represent you in the world of farmland. This helps extend your network and your access to quality opportunities to participate in the asset class.

How to Value Farmland

As you start identifying investment opportunities, valuation is a key area where a little know-how will give you a leg up in your investing strategy. How do you know you’re being presented with a good deal?

There are three primary points to consider when valuing an agricultural property:

1. Farm income: This is based on consistent crop yields. How much crop can a farm grow? How steady does that amount stay over time? How reliable are market access and prices in the area? For most investors, income ultimately comes down to the expected rental rate for the farm, and this can vary by region and crop type.

2. Local land markets: Strong land markets have enough buyers and sellers to support healthy prices and trade. You want to be sure the market will support the sale of the farm down the road. This component also includes comparable sales. What are similar properties in the area going for?

3. Other assets and income: Does the property come with infrastructure like buildings or irrigation systems or with non-farming sources of income like an energy or hunting lease? Sometimes these can cause unwanted complications, but they can also present the opportunity for extra income.

Once you have a good idea of these factors, you can begin to evaluate the price appropriateness of a given property and make smart investment choices.

Farmland Lease Agreements

There are myriad arrangements by which landowners earn money from working farms. Here are the most common, ranging from hands-on and more risky to passive and less risky:

• Owner-operator: The person who owns the land farms it, thus reaping the total annual income as well as shouldering all the risk of loss during bad years.
  

• Custom farming: A landowner pays someone a fixed rate to operate their land, remaining responsible for all the costs of operation but also keeping the total profits. According to the 2012 Investors' Guide to Farmland by agricultural asset manager Greyson Colvin, historical returns have approached 9-10% of land value annually, but this has required some risk exposure to harvest quality and commodity price fluctuations.
  

• Crop share: Both the farmer and the landowner receive a percentage of farm profits, sometimes also sharing a percentage of total costs. Crop sharing has in the past generally brought investors returns of 5-6% of the total land value, according to Colvin. It can mean lower expenses for the landowner but may entail some risk, including commodity market and crop risks.
  

• Cash rent/lease: A farm operator pays a fixed cash rent per acre to the landowner. The farmer remains responsible for the operation, and rent is usually prepaid ahead of the planting season, reducing the risk to the landowner. This arrangement is believed to carry the least risk for the landowner.

Many people seeking farmland for its value as an investment prefer the cash rent model, and this is what the most common farmland investment vehicles use.

Passive Farm Income

Aside from crop production, there are plenty of other ways to make money from land you own. Usually, these are leases for things like:

• recreation/hunting
• water rights
• mineral rights
• space for information towers, billboards, wind turbines, solar panels, etc.

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

Choose Your Method

Farmland Asset Management

Any farmland investment method aside from direct purchase and management will involve directly or indirectly outsourcing the administration of the investment to a third party.

Professional farmland asset management includes both the financial management of land investments as well as the administration of farms themselves. Asset managers will handle aspects like purchase and disposition, taxes, distribution of returns, and communications with investors.

They may contract with regional farm managers to handle issues such as insurance, leasing, and overseeing farm operations. They may also employ in-house farming experts to oversee some or all of those responsibilities.

It is important to choose asset managers with expertise in agriculture and strong networks across land markets. Quality farmland asset management can benefit investors in two key ways:

• Strong due diligence: the investment manager’s access to land and market data for thorough vetting of investment opportunities.

• Entry/exit choice: the investment manager’s ability to use market conditions to the investor’s advantage for the investor when entering and exiting an investment.

Several prominent ways to invest in farmland and access farmland asset management include farmland investment platforms like AcreTrader, REITs, ETFs, private equity, and ag stocks.

Private Equity Farmland

Private equity funds are managed pools of capital that offer institutional alternative asset investors—like endowments, pension funds, and high net worth individuals—the ability to invest in land at scale. They are like REITs, but work on a larger scale, typically serving larger investors.

Pros of private equity funds:

• Potentially high returns
• Built-in diversification since funds typically invest in multiple properties
• Less exposure to stock market volatility

Cons of private equity funds:

• High investment minimums
• Lower liquidity due to required lock-up periods
• Potential for high fees

Agriculture Stocks

Agriculture stocks are shares in publicly traded agricultural companies. These may be individual companies or managed, pooled funds. Ag stocks provide investors with exposure to the broader ag industry; they’re not farmland-specific.

“Ag stocks” is a general term that encompasses several of the other investment vehicles mentioned below. The stocks of many REITs, ETFs, and other publicly traded, pooled funds fall into this category, as do the stocks of individual companies like John Deere or Cargill.

Pros of ag stocks:

• Exposure to high-level trends, such as advances in agtech
• Broad exposure to agricultural sectors of interest, such as food or logistics
• Higher liquidity than investments in land itself

Cons of ag stocks:

• Exposure to stock market risk and volatility
• Lack of choice in individual assets: If you’re an investor who’s interested in almonds, for example, there may be only a handful of publicly traded almond companies.

Farmland REITs

Real Estate Investment Trusts, or REITs, are companies that buy, own, and manage properties in a fund. Like farmland investment platforms, REITs pool the capital of many investors, but they function much more like a mutual fund, allowing investors to purchase shares in the REIT as a whole.

Pros of REITs:

• Liquidity: Similar to stocks, REIT shares can be bought and sold at will, although they are designed to reward longer term investing.
• Diversification: Since the funds invest across many properties, diversification is built in.
• Strong return profile: Tax obligations that favor investors plus long term value growth strategies combine to make REITs a well-known source of consistent dividends and high total returns.

Cons of REITs:

• Exposure to stock market volatility: Because most REITs are publicly traded, they are prone to fluctuations in the market as a whole.
• Increased risk: Debt is often used to pay out REIT dividends, adding to their overall risk.
• Lower transparency: By nature of their structure, the inner workings of a REIT and the properties it owns are relatively opaque.

Agriculture ETFs

Agriculture ETFs, or Exchange Traded Funds, are publicly traded, managed funds that invest in agricultural companies and commodities. Agriculture ETFs come in a wide variety, from those that follow a single commodity to those that basket securities from across the ag sector.

Pros of agriculture ETFs:

• Broad selection of type and focus of fund
• Affordable entry minimums
• Lower correlation with traditional stocks and bonds

Cons of agriculture ETFs:

• Potentially lower returns
• Less exposure to niche markets of interest

Farmland Investment Platforms

Farmland investment platforms are online marketplaces specifically designed to facilitate the purchase of proportionate shares in a specific property or farming company. AcreTrader falls into this category.

Pros of farmland investment platforms:

• Lower minimums: In the past you probably would have had to purchase a whole farm, which is rarely less than a million dollar investment upfront. Farmland investment platforms set their own minimums, typically starting around $10,000-$15,000.

• Diversification: Farmland investment platforms allow you to participate in offerings across crop types, climates, operators, regions, and even countries.

• Simplicity: Responsibility for farm leasing and deal administration is usually handled by affiliates of the platform.

Cons of farmland investing platforms:

• Lower liquidity: There is often a required longer term hold period on farmland investment platforms. Since their shares aren’t publicly traded, there may be limited options for disposition. Some farmland investment platforms offer a secondary marketplace for this reason.

• Income requirements: Some, but not all, farmland investment platforms, may require you to be an accredited investor to participate.

Hone Your Strategy

Farmland investing done right is a long game. Now that you’re familiar with the asset and how to access it, you can start to develop your holding and diversification strategies.

Farmland Investment Holding Periods

A reasonable hold period for a farm investment, generally speaking, is long enough to realize gains from appreciation.

Timing depends on the farm type:

• Row crop investments, which produce a relatively steady income, will generally have a holding period of around 5-10 years.
  

• Permanent crops, like grape vines or fruit and nut trees, take more time to mature and thus have typically generated the higher annual returns that will balance out depreciation; 10-15 years is a reasonable expected holding period.
  

• Timber investments also have longer holding periods, in the 10-15 year range, due to trees’ long lifecycle; timber harvests and thus cash flows are intermittent, rather than annual as with mature permanent crops.
  

• Energy investments, like solar or wind farms, vary depending on many factors such as date established and average income.
  

• A value-add farm, in which investors fund a specific improvement project such as irrigation installation, may have a shorter timeline (2-3 years) for realizing appreciation.

Ultimately, when to sell will depend on the local market and what opportunities emerge.

How to Diversify Farmland Holdings

Once you’ve become familiar with farmland investing and possibly made an investment or two, you may start to think about diversifying within the asset class. This can help you balance risks by owning farms with different characteristics.

Investors typically diversify farmland holdings across four categories:

• Geography: region, length of growing season, average rainfall, average temperatures
• Commodity: crop type, crop price
• Tenant: individual, farming family, farming company
• Optionality: land that is capable of growing more than one crop

The more diversified your farmland portfolio across these variables, the less likely that a bad outcome in one year or one variable will affect the performance of your portfolio as a whole.

Final Thoughts

Gone are the days when you would have to buy a whole farm in order to reap the benefits of farmland ownership. If you’re thinking about getting involved, here a few key takeaways to in mind:

• Learn enough about the asset class ahead of time to make sure it fits your goals and you’re making informed decisions.
• Choose an investment vehicle that suits your needs regarding risk, returns, and time horizon.
• Make sure you’re thinking long term so that you can plan your farmland investments strategically.

Armed with an informed strategy and the investment method that works for you, you can get involved in this longstanding and attractive asset today. Get started by exploring our investment offerings.

The above content is not intended to be a comparison between products, but is intended for general, educational and informational purposes only. Any performance noted is historical and there is no guarantee any trends will continue. All investing involves risks, including the complete loss of principal. Diversification does not guarantee a profit or protect against loss in a declining market. It is important for each investor to review their investment objectives, risk tolerance, tax liability and liquidity needs before investing. Investment vehicles have differences in fee structure, risk factors and objectives. Investments are considered speculative, involve a high degree of risk and therefore are not suitable for all investors.

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