Is Farmland a Good Investment?
Real estate values have been booming since the coronavirus pandemic, led by strong returns in sectors such as multifamily, industrial, grocery-anchored retail, self-storage, and data centers. In this climate of rising values, farmland values are also increasing making it a compelling but overlooked asset class. Agricultural real estate might not familiar to most, nor is it as intuitive to understand as other asset classes like multifamily apartment buildings, but it has much to recommend it.
Global populations are growing and that means increased demand for food, but the supply of farmland is not growing, and in the Central Valley of California which is the single largest producing area of food for the US market (by far), supply is actually shrinking.
This means investors in farmland are enjoying favorable tailwinds as the supply demand imbalance intensifies. Read on for more about the potential for boosting your investment returns with farmland and for how we see the opportunity here at Bravante.
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Why is farmland a good investment?
Farmland can routinely post double-digit annual returns especially when the right crops are planted in water abundant areas, farmed properly, and are distributed efficiently (i.e. at low relative costs) to consumers.
According to statistics posted on the site of crowdfunding platform AcreTrader, agricultural land has generated historical annualized returns of 11%, trailing only stocks’ 12% and ranking ahead of commercial real estate’s 9% return. Farmland offers a variety of benefits. It is a hard asset with low volatility, and agricultural land acts as a strong hedge against inflation. This is because the cost of food is directly related to inflation being the third most important contributor after housing and transportation. Put another way, inflation goes up because food prices go up and so our top line revenues here at Bravante go up in lock step with inflation.
Farmland is a broad category that includes diverse crops and geographies – corn, wheat and soybeans in the Midwest and Great Plains, almonds, avocados, citrus, and grapes in California, potatoes and berries in New England, juice oranges, sugar and vegetables in Florida.
At the most fundamental level, food is resistant to economic cycles because:
- People need to eat no matter what is happening on a macro-economic level.
- Agricultural production is enhanced by technology, but farming is unlikely to be replaced by technology or to be outsourced (global competition long has been part of the agricultural sector).
- The supply of farmland is static – in California it is declining in some areas (making our land here at Bravante even more valuable) – but the planet’s population is growing both in number and in affluence which increases supply.
In China and India alone, hundreds of millions of people have been lifted from poverty in recent decades. That means more and more people around the world are consuming food like middle-class Westerners – and that translates to more demand for food. Yet the supply of farmland is not expanding – it is contracting.
Farmers vie with residential builders and commercial real estate developers for a dwindling supply of land. Suburban development keeps moving farther away from urban cores. There is even a name – “exurban” development – for the housing trend. Meanwhile, demand for distribution centers and solar power means some farmland is being converted to warehouses and to solar farms.
Indeed, in the California Central Valley where our target acquisitions are located, large swaths of existing farmland will become fallow as legislation – and the realities of hydrological conditions – restricts water supplies on ranches formerly competitive to those we are buying.
Despite the obvious opportunity, agricultural tracts are increasingly attracting the attention of sophisticated institutional and private equity investors who view agriculture as a reliable and predictable portfolio option that provides outsized risk, return yields relative to other real estate asset classes. Viewing agriculture through the assumptions underpinning the cells in their underwriting spreadsheets, these sophisticated users understand that while leverage can boost returns, it can also be hazardous to long term stability when overused.
While those types of investors increasingly dominate other classes of commercial real estate with their 65-85% leverage (when used in conjunction with mezzanine debt or preferred equity capital), farmland remains a low-leverage corner of the real estate market. As an asset class, United States farmland has lower leverage compared to other real estate sectors. According to USDA data from February 2022, real estate debt on farms is just $312 billion, representing an 11% debt-to-equity ratio overall. That might explain why the USDA reports steady appreciation in farmland over the past decade.
By focusing on buying ranches with considerably higher growth rates than the industry average and applying still very conservative 50% debt to our farms, we are able to generate significantly higher returns to our investors than other farmland investors whose approach is less strategic than ours.
There is an important caveat to investing in agricultural property: Only those sites with quality soil and access to abundant water will thrive. Plots that lack either of these two important inputs will not prove profitable to investors in the long run. California’s Central Valley illustrates this dichotomy. While the region is the most productive farm area in the U.S., persistent drought means that only those sites with reliable access to groundwater or surface water will produce strong returns for investors. Focusing on farms with predictably reliable access to long term water supplies lies at the core of our investment approach because even if it means paying a slight premium today, in the long run ours will be amongst the highest valued land in the region.
Why invest in US farmland specifically?
Silicon Valley tech firms and Wall Street financial companies hog the spotlight in the world’s largest economy. But the United States remains an important agricultural producer. That translates to strong returns. The value of U.S. farmland has appreciated by 6% a year over the past half-century, with only rare down years. And that’s not counting cash rent yields. Farmland has produced a positive return every year since 1991, according to the USDA, posting average returns of 11.5% a year. In other words, owners of American farmland have enjoyed returns similar to those experienced by stockholders.
Owning U.S. farmland brings benefits aside from high returns. One is low volatility. American agricultural returns generally come with fewer ups and downs than other asset classes. What is more, farmland does not move in lockstep with the stock market. Reflecting that low correlation, U.S. farmland routinely generates a positive return in years that the S&P 500 declines.
Is farmland a good inflation hedge?
Real estate in general is considered a hedge against inflation. And agricultural land is especially attractive as a way to protect your assets from rising prices. Farmland is a hard asset that produces such commodities as corn, wheat, and citrus – and prices of those products rise in an inflationary environment (in fact, they drive inflation in part, as mentioned above). Therefore, farmland offers a hedge against inflation on two fronts: Land values rise during an inflationary cycle, and crop income also rises with overall prices.
How accessible is the farmland investment market?
The accessibility of the farmland investment market depends on how you buy. If you want to take direct ownership of dozens or hundreds of acres of farmland, you will need a sizable down payment, due diligence that could likely take weeks or months – and, if you want to do it properly (which of course you would) a complete change in lifestyle! You cannot run a farm effectively from the urban suburbs. To be successful, you must live on or nearby your farms, and to be really successful it is really no different from any other real estate asset class, you have to live through multiple cycles so you know what can go wrong and how to mitigate the downside as a consequence.
On the other hand, if you want to invest in agriculture you can, through a crowdfunding platform, by buying shares in a real estate investment trust, or by investing directly with seasoned, professional farmers like the team at Bravante Farm Capital, you can gain exposure to farmland in minutes, and with a modest upfront investment.
Why is now a good time to invest in farmland?
Given the growing affluence of global consumers, demand for food is poised to move in only one direction – up. In other words, farmland is going to continue to increase in value. Institutional buyers recognize this reality, and they already have identified farmland as a profitable opportunity. Once the trickle of institutional investors turns to a flood, these sophisticated buyers will begin underwriting land value in a way more closely aligned with their usual metrics, such as yield and capitalization rates.
This promises to drive up land prices in areas such as California’s Central Valley. Central Valley farmland currently is sold by the acre without much analysis of the yield on that acre. A farm may yield a 15-20% return on the cost per acre once the farm reaches maturity, so as institutions buy even more farmland and apply cap rates and measures of yield to their underwriting of value, there is potential for strong growth in the value of the best farms i.e. those we are focused on acquiring.
How do you make money with farmland?
At the most basic level, owners of agricultural land make money in two ways. The long-term play is appreciation – if the value of the parcel goes up while you own it, you can sell for a profit or refinance to take out original equity while continuing to enjoy income from crop production profits. The other potential revenue streams are shorter-term – you can lease the land to a farmer while you own it, or you can produce crops yourself, as we do here at Bravante, and sell your output for more than your costs of planting and harvesting the crop.
However, there are many combinations and permutations within those broad parameters. Will you invest in farmland in the Corn Belt, or a cattle ranch in Texas, or an orange grove in California? Are you knowledgeable enough to buy directly and make the lifestyle commitment to farming the land yourself, or would it be better for you to invest with professionals like Bravante?
Types of farmland investments
You could opt for direct ownership of farmland, but this strategy requires no shortage of expertise. A savvy investor needs to know many things, including a site’s soil quality and water availability, along with pertinent weather patterns, crop cycles, threats from pests, and market conditions for the crop being grown, just to name a few.
Invest in REIT stocks
If direct ownership of farmland not possible for you, there are other lower-barrier alternatives. Real estate investment trusts (REITs) are publicly traded landlords that allow investors to play the real estate market by assembling property portfolios and then offering ownership through shares of stock.
REITs are required to pay at least 90% of their profits as dividends, and most pay 100% of their taxable profits to shareholders. The main upside of REITs for investors is portfolio diversification – it is easy enough to buy into a REIT as they are as liquid as stocks plus REITs typically hold hundreds if not thousands of assets further diversifying risk. On the downside, REITs trade as stocks which means that they behave like stocks, are as volatile as the stock market and are vulnerable to the daily news cycle. They are also subject to the ‘liquidity premium,’ which is the cost a REIT investor must pay to convert an illiquid asset (real estate), into a liquid one (a tradable REIT stock).
Farmland Partners (NYSE: FPI) is an example of a farmland REIT. At the end of 2021, the REIT owned more than 160,000 acres of farmland across a number of states. Most of the land is leased to farmers, Farmland Partners said in its annual report. The Denver-based company says 70% of its portfolio is used to grow primary crops, such as corn, soybeans, wheat, rice, and cotton, and approximately 30% is used to produce specialty crops, such as almonds, citrus, blueberries and vegetables.
The REIT reports in its latest annual report that shareholder returns were 128% over the past five years, trailing the 233% return for the Standard & Poor’s 500 and the 180% gain for Dow Jones REIT index.
Another agricultural REIT, Gladstone Land Corp., owned more than 112,000 acres of farmland as of its latest annual report. Gladstone Land’s holdings are primarily in California, Colorado and Florida, but it has holdings in other states, too, including Nebraska, Arizona and Texas.
Invest through a crowdfunding platform focused on farming
In recent years, a new breed of crowdfunding platforms has emerged to provide investors an entry point into the farmland game. In general, these companies buy a piece of agricultural property on behalf of investors, who can get a small piece of a project for as little as $10,000. All the platforms promise to make investing easy by screening properties and negotiating the deal. The investor worries only about signing up and sending the money.
One disadvantage of crowdfunding is that diversification requires some legwork. The platforms’ investments typically are limited to one property growing one type of crop. So if you want geographic diversification and exposure to a variety of types of agricultural products, you have to invest in multiple deals.
AcreTrader is a real estate crowdfunding platform. It connects investors and farmers, giving investors a way to play farm properties and farmers access to capital to operate their farms. AcreTrader says investment vehicles typically are divided into shares equal to a tenth of an acre. If you buy 20 shares, your ownership represents 2 acres of land and the associated dividends.
FarmFundr is a real estate crowdfunding platform that focuses on farmland devoted to specialty crops. The platform requires that investors be accredited, and the minimum investment ranges from $10,000 to $100,000, depending on the property.
FarmTogether is a real estate crowdfunding platform that specializes in farmland. The site requires you to be an accredited investor. FarmTogether investors receive shares of limited liability companies that own the underlying farmland. This approach gives investors exposure to small slices of independent farms.
Farmland LP is a real estate investment trust with more than $175 million in assets. The company’s 15,000-acre portfolio is concentrated in California, Washington, and Oregon. Farmland LP focuses on sustainability and organic farming. The company says it “generates returns by converting conventional farmland to sustainable.” In its latest fund, Farmland LP’s entry point is an investment of $50,000 from accredited investors.
Harvest Returns is a crowdfunding platform that focuses on farmland and on indoor growing operations. Investors participate in deals that are smaller than those offered on other platforms, and the minimum investment can be as little as $5,000.
Steward is crowdfunding platform that invests in smaller deals, with a heavy emphasis on sustainability. Steward embraces the go-small trend, focusing on such issues as biodiversity, regenerative agriculture and animal welfare. Steward lets investors get started with stakes as small as $100.
Related article: Farmland Crowdfunding Platforms: A Real Estate Investor's Guide
Demand for food is expanding even as the supply of farmland remains stagnant and, as in the Central Valley, contracts. Given this obvious supply-and-demand signal, investors would be wise to move some money into this asset class.
While the sector largely has been ignored by institutional investors, these major players are beginning to bid up prices for farmland in key regions of California’s Central Valley and elsewhere. However, this opportunity is not as simple as buying farmland in California and waiting for the value to increase. Water supply is a significant wrinkle. Those properties with access to abundant water are likely to enjoy significant increases in value in the coming years.
But farmland that lacks access to water will lose out in this race for value. Divining the probable winners and likely losers is no easy task – analyzing each parcel’s potential requires a knowledge of crop types and soil quality, not to mention having a good handle on water supplies.
Farms that lack a predictable supply of water are likely to lose value in the future as they become fallow and farmland with access to surface water and groundwater, those we are focused on acquiring, will thrive.
In short, agricultural real estate offers a compelling opportunity – and investing the Bravante way particularly so. Contact us to learn more.