Why Professional Investors Are Buying Farmland
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This article was originally published on Forbes.com on July 9, 2019 and updated here on June 30, 2021.
In April 2019, I attended the Global AgInvesting conference, where our company had a booth. While there were a few dozen U.S. farm investing funds there, I was encouraged to see how many pension funds and high-net-worth family offices were also there looking into farmland investment.
One thing was apparent: Professional farmland investing was growing significantly. At the time, this was further reinforced by the involvement of large farmland buyers like Bill Gates, a fact which has, of course, become global news in recent months.
To be clear, while agriculture/farmland-focused funds have grown assets under management by more than a factor of 8 over the past decade, according to Preqin data, this industry is still underprofessionalized when the $30 billion of investment assets is taken in context of the multi-trillion-dollar farmland asset class.
So why is this investment industry growing so quickly with professional investors? The conclusion seems pretty straightforward: strong historical investment returns, asset stability and portfolio diversification.
Farmland Investment Returns
Farmland has proven to be an attractive asset class for professional investors, with almost uniformly positive returns since the early 1990s. This is because investors can make money two ways: from the annual cash rent that farmers pay to use the land and also from steady increases in land values.
For example, consider a standard piece of farmland in the Midwest or the South. Assuming an annual cash rent of 4% and land value growth of 6%, the total annual return would be around 10%. For stable and productive row-crop farms, this would be considered normal or even attractive long-term returns in the current environment.
On the other end of the spectrum, an almond farm in California may produce an 8% yield and annual land value growth of 4%, resulting in annualized returns of 12%. However, the latter example may have more volatility — swings in price and in the annual cash income.
Regardless of the above examples, it is important to note the investment gains are being discussed without the use of debt to amplify returns.
When utilizing small amounts of debt that equate to lower loan-to-value ratios than typical real estate property investments, the return profiles of farmland investing can have less volatility than investments in residential or commercial real estate.
A core theme for professional investors in farmland is supply versus demand and the associated asset stability produced by it.
Basic economics would suggest that the dynamic of shrinking farmland supply and increasing demand for food would lead to land values increasing in price. Indeed, this has proven true historically via steady increases in farmland value.
Farmland has shown itself to be an attractive investment candidate in its own right. However, agricultural land also has little or no correlation to most major asset classes, such as stock markets, bonds or gold.
Thus some professional investors have identified farmland as a useful portfolio diversification tool.
2017 research by TIAA Nuveen found that “real assets” like farmland, timberland and real estate are effective investments for portfolio diversification.
In its research, TIAA suggested that adding farmland to its model portfolio increased average annual investment returns while simultaneously decreasing the volatility of the portfolio.
An Underutilized Asset Class
Interestingly, despite these potential benefits, the number of investors buying farmland remains small.
The relative immaturity of farmland as a professionalized asset class is due to much of it being closely held, lack of transparency in the marketplace and the unfamiliarity of the asset among non-farmers.
The closely held nature of farmland has been a particular point of pain for investors. In fact, only 3% of U.S. farmland is owned by corporations. While almost 40% of farmland is rented out by its owner, most of those owners are individuals. Thus, investment funds and professional investors still only comprise a tiny slice of overall U.S. farm ownership.
Though professional ownership and investment in farmland is growing, the relatively small participation in the asset is one primary reason it hasn’t been widely invested in. Another reason is education.
The industry is beginning to get some attention, but financial journalists need to spend more time truly assessing and writing about this asset class for it to gain more mainstream notice.
While farmland has been relatively underutilized and non-publicized as an alternative asset class, it does seem clear why it is becoming more professionalized and sought after by big money managers.
Farmland has mostly remained off the radar for mainstream financial news and press, but as interest in the asset class by investors big and small grows, we are indeed hearing more and more about it.
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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Most farmland investments can be categorized as row crops or permanent crops, each of which displays different investment characteristics.
Learn how farmland can be a great diversification tool by viewing farmland's correlation to major asset classes like stocks, bonds, timberland,...