Farmland Investment: The Full Guide
There’s no getting around it: everyone needs to eat. Yet as the global population expands, the amount of arable and irrigable land remains a finite resource. Savvy investors are starting to see this as an opportunity, and in turn, are pouring unprecedented capital into the farmland sector. Farmland, a historically niche asset class, is now drawing attention from institutional, private equity, and billionaire investors alike.
In this article, we provide a detailed guide for those interested in learning more about farmland investing.
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Farmland Investing Trends
There are a few key farmland investing trends that any prospective investor will want to become familiar with, including
Value-Add Farmland Investing:
The farmland market has historically been highly fragmented and largely, remains so today. For example, in the state of California, there are approximately 70,000 farms, most of which are only 20 to 40 acres in size. Many of these farms have been owned by the same families for generations. Now, the current generation of farmers is approaching retirement with future generations, uninterested in operating the farm, looking to sell the property.
This is creating an opportunity for value-add farmland investment like we here at Bravante. Our approach is to acquire these underperforming farms, improve revenues by planting higher profit crops with consistent, predictable yields and, in turn, drive up their value.
With more sophisticated and deep pocketed institutional investors entering the landscape, the demand for every larger farm ranches has grown. This is driving a push towards farmland consolidation with smaller, mom-and-pop farms being acquired and aggregated into larger, institutional scale operations. Here at Bravante, we are buying these smaller, multi-generational farms as the current ownership retires and the next generation has moved on from farming.
We then apply our knowledge and experience in farming, and our direct ownership of packing houses to bring economies of scale to the farms, turning them into larger farms with more efficient operations. The smaller farms we are looking to acquire do not own their own packing facilities but rely on independent facilities that can add anywhere up to 10% to their cost of good sold.
Related Article: Value-add Strategies for Farmland Investments
The aggregation of farmland creates the scale necessary to attract institutional buyers, who are often willing to pay a premium well above what the individual buyer would have been willing to pay for that same farm.
You can think of this as being similar to the way a multi-family sponsor will assemble a portfolio of outdated, Class B apartment buildings, add value to them bringing them up to Class A standards with full market rents and optimal occupancy rates, and selling the entire portfolio to an institutional investor. It is much the same with farmland. Institutions do not want the headache of assembling ranches and adding value; but they do like large scale ‘Class A’ farms, with mature, high-profit crops – and that is how and what Bravante delivers.
Institutional and Other Billion-Dollar Buyers Entering the Marketplace:
In recent years, there have been a growing number of institutional investors and high-profile buyers (e.g., Bill Gates, Jeff Bezos) buying farmland. They are drawn to farmland for several reasons—from its diversification benefits to its historically low volatility.
How much does it currently cost to invest in farmland?
Farmland has historically sold on a per-acre basis. Unlike other commercial real estate sectors, where investors use cap rates to back into a sales price (i.e., the “income-based” valuation technique), banking regulations prohibit the use of the income approach or appraisals given how unpredictable farmland income is said to be. Therefore, a lender’s underwriting is always based on comparable sales, with land valued on a per-acre basis.
Using this method, investors can expect farmland to trade for anywhere from $30,000 to $50,000 per acre. The actual sales price will be influenced by what other nearby farms have sold for in recent years.
This catch-all approach of valuing farms based on a per-acre rather than yield approach leaves out those farms that do have predictable income streams from high profit, high demand crops like certain citrus (Cara Cara, Sanguinelli Blood, Old Line Washington Navel for example). Our target farms are those that are underutilized and sold by the acre. Our strategy is to redevelop them with high-profit crops with predictable income streams. And our goal is to add more value to the land by assembling increasingly large ranches that will appeal to institutional investors underwriting to yield and not just land sale comparables.
The opportunity that this approach presents, therefore, is because it assumes high-yielding farms are worth the same as low-yielding farms. This results in farms being sold, on a per-acre basis, for less than their true, long term potential value. Because the income derived from each acre is not used as a metric, this creates an artificial valuation that is often below what a farm should otherwise be worth to an investor like Bravante with a long-term perspective.
As we will explore in more detail below, this is an opportunity for investors seeking value arbitrage while capturing yield along the way from crop sales.
Why invest in farmland?
There are many reasons to invest in farmland. One key reason is that the sector has especially strong underlying fundamentals. The global population, which is roughly 6 billion people today, is expected to reach close to 9 billion by 2050. Much of this growth will occur in developing nations (e.g., India, China) where standards of living are continuing to rise. As this happens, people will begin to consume more calories. This combination – more people who consume more calories per capita – will create unprecedented demand for farmland.
What is more: farmland, unlike other commodities, is a finite resource. There is only so much arable land that can be used for food production. The arable land that exists will need to become more productive, which will further enhance its value on a per-acre basis.
Together, these factors create an opportunity for value arbitrage: investors can buy farms by the acre, add value, and then watch the value of that farmland increase as yields go up while cap rates come down. While farmland is not currently valued using the cap rate model, there are reasons to believe this will change moving forward.
For one, some crops are predictable as discussed and therefore lend themselves to the income-based valuation method. Moreover, most institutional investors are habituated to and indeed are required to value their real estate investments on a cap-rate basis. As more institutional investors buy farmland, they will inevitability begin using cap rates to assess a farm’s profitability (even if cap rates are not considered as part of a lender’s underwriting).
As more investors value farmland using cap rates (rather than comparable sales), the value of farmland will rise—all else remaining constant. It will have a virtuous effect: as institutions pay more per acre, this will in turn drive up comparable sales as well.
How do farms yield income?
Those who invest in farmland can expect to generate income a few different ways. The first is through rent payments. In recent years, a growing trend is for farmers to sell their land to a third-party and then lease back the property for their continued operation. Those who do so will make monthly or annual rent payments, just as tenants do with other types of rental property. This is one key source of income for farmland investors – though not the model Bravante adopts as we farm our own land.
Another source of income is tied to the value of the crops that are harvested on that land. Here at Bravante, we collect profits from the production of crops on our farms. We also own and operate the packing plants which incorporate harvesting and distribution to end users like Costco and Sam’s Club amongst many others.
Few if any of the smaller farmers whose farms we acquire have the advantage of also owning a packing house. This puts them at a disadvantage because they must hire independent packers who will take their own profits out of gross revenues from crop sales and pass on to the farmer only what is left over.
At Bravante our packing charges are around 48% of gross revenues whereas a smalltime (40-acre) farmer can expect to pay up to 52% - which has a direct impact on profit margins. In addition to this difference, and more importantly, is that we get higher crop utilization (yields) through employing better packing processes overall. On average, this adds another 6% to our bottom line which, combined with the packing charges difference, adds up to 10% overall in higher profits for the ranch just from the packing function alone.
By bringing our packing operations to the farms we acquire, therefore, we can benefit from economies of scale, reducing costs, driving profit down to the ranch level, and increasing net operating income and dividend distributions for our investors.
Keep in mind that, while owning the packing facility is advantageous, it is not sufficient of itself. A well-run operation such as the one we have at Bravante, leverages the benefit of owning the packing facility with also owning the best farms and implementing first class farming operations to optimize revenues. All factors must coalesce to optimize investor returns.
A third way to earn income from farmland investments is through land appreciation. According to the National Agricultural Statistical Survey, farm real estate values increased 7 percent between 2020 and 2021. Farms appreciated to varying degrees depending on whether the farm was used as pastureland, cropland, or rangeland.
Appreciation also depends on geography, with West Coast areas experiencing substantial price increases during that same time: farmland values were up 9 percent in California and more than 10 percent in Oregon – much higher than the national average. And, of course, within those data there are farms that far outperform the averages and it is those with the highest value appreciation potential that we are targeting for our acquisitions.
Farmland Investment Yields
Over the past 50 years, the value of American farmland has risen by about 6.1 percent per year, with only five down years during that period. When cash rents are included in the value of the land, the returns are even more impressive: since 1991, farmland has produced a positive return every year, with returns averaging 11.5 percent, according to the U.S. Department of Agriculture. This makes it more profitable than nearly all other asset classes during that same period, with the exception of the Dow Jones REIT Index.
To be sure, farmland investment yields vary based on several factors, including how the land is used and region where the farm is located. Yields can be enhanced through value-add improvements to both the land and farm operations as is our modus operandi here at Bravante.
Things to Consider
Like any asset class, there are certain factors that will influence the profitability of any farmland investment. For example, the most successful farms will have high-quality soils, access to sustainable water sources, and will be cultivated with crops that are both consistently predictable and profitable. Successful farms also require careful operation by knowledgeable farmers. Here at Bravante, and as mentioned above, we also maximize profits at the ranch level by being vertically integrated with our own low-cost, reliable packaging and distribution systems.
Farmland Investment Risks (and how to minimize or avoid them)
Farmland investments are not foolproof. If that were the case, then every investor would have farmland in their portfolios already. There are certainly some risks to consider, just as there are in any class of commercial real estate. For farming, the risks are mainly associated with a) poor weather conditions or other disruptions to crop yields; and b) poor farm operations.
Both of these risks can be mitigated. Insurance is one tool used to mitigate risk associated with natural hazards like drought, hail, fire, and crop damage caused by wild fauna, flood, excessive rainfall, etc. The federal crop insurance program offers farm-level insurance policies that help protect farm revenues. Roughly 70 percent of U.S. cropland is insured by one of these federal insurance policies and we fully insure our entire portfolio against these kinds of risks.
Risk can be further mitigated through professional farmland management. Farms are most successful when run by an experienced, professional farmer and/or team of people who can make decisions based on profitability. An experienced management team will also be proactive in identifying value-add opportunities that boost returns for investors.
How can I invest in farmland?
The average investor will not want to purchase their own farm. As noted above, successful farmland investments rely on skilled operation of those farms. Instead, most people will want to passively invest in farmland. There are several ways to do so, including:
There are two primary farmland REITs listed on the U.S. stock exchange: Gladstone Land and Farmland Partners. These REITs (real estate investment trusts) buy large parcels of farmland that they typically lease back to local farmers through contracts that can be structured in many ways. The cash yields for these REITs are driven by crop prices, the quality of the tenants, the lease arrangements, and the efficiencies in scale and expenses.
Shares of these farmland REITs can be easily purchased and sold, as is the case with any stock. This makes farmland REITs attractive to those with either a) little capital and/or b) who want to preserve liquidity. Note: when someone buys shares in a farmland REIT, they are buying an equity stake in that company and not in any specific farmland itself.
Another way to gain exposure to farmland is through a farmland ETF (exchange-traded fund). Farmland ETFs are funds that purchase futures contracts on agricultural commodities. These are considered derivative products, meaning there is no underlying asset. As such, buying a farmland ETF does not equate to any actual farm or land ownership.
Some of the most notable farmland ETFs include the Invesco DB Agriculture Fund, which has almost $1 billion in assets under management, and the Teucrium Corn Fund, which provides exposure to corn futures. The Teucrium Wheat Fund, Teucrium Soybean Fund, and Teucrium Agricultural Fund are other farmland ETFs for investors to consider.
Farmland Investment Companies
An alternative to investing in a publicly traded REIT or ETF is to invest directly into a farm alongside a farmland investment company. This is different than outright buying a farm. Instead, when you invest with a farmland investment company, you are investing in a specific farm that will be managed by a specific farmland operator – oftentimes, the investment company, which is serving in a dual capacity of owner/operator.
Examples of farmland investment companies include Capitaline, a farmland investment company focused on deals in the Midwest, and The Farmland Company, a firm built by farmers that is focused on restoring access to farmland for the next generation of small farmers. Bravante Farm Capital is another example of a farmland investment company, one that is focused on aggregating California-based farms that are then redeveloped, improved, and optimized to maximize returns for investors.
Farmland Investment Platforms
An increasingly popular way to invest in farmland is to do so on a fractional-share basis. Two prominent platforms, AcreTrader and FarmTogether, both allow individuals to invest in farmland with as little as $15,000. These platforms pool investors’ capital, which is then used to purchase a farm that is rented to a third-party operator. Sometimes the operator is the farmer selling the property, in which case they are engaging in a “sale-leaseback” of the property. In other cases, the property is being sold from one investment group to another, with the farm operator having no stake in the transaction at all. Other farmland crowdfunding platforms include FarmFundr, Farmland LP and Harvest Returns.
Steward is another farmland platform worth noting as its approach is different from the others. Unlike AcreTrader and FarmTogether, which allow people to invest in equity, Steward aggregates capital that is then utilized as debt or other financing needed by farmers. The platform originated in 2016 with the goal of helping small, independently-owned farms increase their access to capital. These debt-based deals often have more predictable returns than equity investments because they are based on a predefined interest rate.
How to select the best farmland opportunities for you
Anyone who is considering investing in farmland will want to do so in the context of their broader financial and lifestyle goals. Here are some key questions to help guide your decision-making process:
- Are you considered an accredited investor? Some investment opportunities are only available to accredited investors (they are here at Bravante), which means you must earn $200,000 per year (or $300,000 with your spouse) or have a net worth of at least $1 million (excluding your primary residence).
- What is your investment time horizon? Some deals provide access to a secondary market, while others do not. For example, there is no secondary market on AcreTrader. Therefore, someone who invests on this platform should be prepared for their capital to be tied up for at least 3-5 years. FarmTogether offers a limited secondary market, so this would be more appealing to those looking to preserve liquidity in the short-term. Similarly, those looking to ensure full liquidity and flexibility would be best off investing in a farmland REIT, as these shares can generally be sold on a day-to-day basis.At Bravante, our strategy is for long term value appreciation and outsized yields based on original investment. To invest with us, please think in terms of building multi-generational wealth with significant annual cash returns, and leave the higher risk, quicker turnaround options to other real estate asset classes that are available.
- How experienced is the farmland operator? Those who passively invest in farmland are putting great faith in the farmland operator. Partnering with a highly knowledgeable, skilled operator – like the team here at Bravante – is critical to the success of any farmland investment. If you are investing in land that will be leased to a third-party (someone outside of the investment group), you should be sure to do your due diligence on this operator as well.
What is your risk tolerance? Those with a lower risk tolerance are generally better off investing in farmland equity investments vs. those with a higher risk tolerance, who may want to consider investing in value add or opportunistic apartment or self-storage investments for example, instead.
Those more familiar real estate classes offer lower yields and long-term value appreciation because they are efficient markets already. Farmland is little known (consumers do not generally understand the economics of farming as intuitively as they do of apartments) and so the market is less efficient which lends itself to finding greater opportunities.
Farmland investment will appeal to anyone who is interested in creating a diversified portfolio that can help hedge against otherwise adverse market conditions. Direct investment into a specific farmland fund, especially when alongside an adept farmland operator like here at Bravante, is particularly attractive on a risk-reward basis.
Are you interested in investing in farmland? Contact us today to learn more.