Farmland investing has been making recent headlines because America’s ultra-rich are gobbling up farmland as a profitable asset. What’s driving this frenzy? US farmland is a limited resource, and food demands are growing. But the ultra-rich aren’t the only investors.
30% of US farmland is owned by investors who don’t farm themselves. This percentage is driven by so growing options for investing in farmland. Most farmers lease the land from investors who purchase the farmland because it offers steady cash flow, manageable or low debt, and high demand.
The Growing Demand For Viable Farmland
As our global population grows, the demand for crop production will need to increase 70% to meet food demands by 2050. Coupled with the fact that farmland is dwindling at an alarming rate, 3 acres per minute just in the US, the value of existing farmland will increase exponentially.
The accelerated demand with a diminishing supply makes farmland an attractive asset class that already generates an average annual return of 11%. This average rate of return outperforms government bonds, real estate, and US REITs. North Dakota and Nebraska farmland average 13% annually and are relatively low cost per acre, making their farmland attractive.
Another factor driving demand is an increase in customer demand for organic and sustainable food models. A recent study found that 45% of Americans actively include organic food in their diet. Organic food retail sales have increased by double digits since 2000 and have an estimated market of $43.3 billion.
Related Link: Farmland Valuation: How to Appropriately Value It
#1: Several Methods of Investing are Available
One of the most significant financial benefits of investing in farmland is that several investment opportunities offer different levels of liquidity and commitment. Farmland has also grown in popularity as some of these methods have become available:
Buy Farmland Directly
The most straightforward way to invest is to buy farmland directly from the seller. Then most investors lease the land to other farmers or ranchers to farm. This option is the most expensive because it requires a significant capital investment.
Buy Shares of a Farmland REIT
You can invest in farmland without buying land by investing in real estate investment trusts (REITs) specializing in farmland purchase and lease. To invest in a REIT, you’ll need a brokerage account and enough capital to buy shares.
REITs make it more affordable and accessible for investing in farmland. REITs are traded on public stock exchanges, so there is some market risk to the investment.
Farmland Crowdfunding Platform
Another way to invest is to buy shares in crowdfunding companies that use the investment to buy more farmland. The investor owns shares in the LLC that holds the legal titles for various farmland investments. Some crowdfunding platforms are limited to accredited investors with substantial capital.
Invest Through a Private Equity Fund
A private equity fund that specializes in farmland investment is another traditional method. The investor generally needs a minimum of $1 million and should expect high management fees to handle the investment.
#2: Farmland Has Manageable Or Low Debt
Because farming assets and equity are at a 50-year record, it is growing faster than its debt. Farm debt has declined by 5% in 2021, and farm debt delinquency rates have also notably dropped, owing to solid earnings and increased demand.
While farm sector liquidity has declined in 2021 and the times interest earned ratio has decreased slightly, debt for most farms is still manageable. Farmland investments should be able to weather increased inflation and interest expenses by generating higher revenue and increasing profit margins.
#3: There are Multiple Income Streams
For farmland investors, the farms can provide multiple passive income streams above and beyond collecting rent. Here are a few of the most profitable income streams from farmland investing:
Recreational Leases
Depending on your farm’s natural resources, investors can lease access to the land for hunting, fishing, boating, mountain biking, horseback riding, or camping. Hunting leases can be exceptionally profitable depending on the game available on the property.
Water Rights
If the farmland has a large body of surface water or groundwater, investors can lease water rights to neighboring farms or municipal water companies. Of course, farmland with water rights is generally more expensive, so investors will want to do a thorough water assessment to determine the value of the water and its sustainability.
Mineral Rights
Some farms have oil or natural gas deposits that the investor can lease to an exploration and production company. Like water rights, investors will want to look into the state laws regarding mineral leasing and the environmental impact of drilling on the land. Mineral leases generally pay 12%-18% of the gross proceeds.
Renewable Energy and Communication Installations
Depending on your weather conditions or location, energy companies and communications companies may want to lease the land to install wind turbines, solar panels, radio towers, or cell towers. These companies may up enticing annual rents that, once installed, can pay passive income for the next ten to fifty years.
Billboards
If the farmland is near a major highway or freeway, companies may be interested in placing billboards on the land. This generates a nice passive income of about 20% of the advertising rate and takes up a relatively small area of land.
Holiday Festivals and Farm Tours
Around holidays, farms make great stops for festivals, pumpkin patches, farmer’s markets, etc. Investors can also set up farm tours for schools, families, or even wine aficionados if the farm is a grape vineyard. This creates a smaller passive income but can also increase community goodwill and brand recognition.
Are you interested in generating passive income from your farmland investment? Learn more about Land Income’s profitable farmland investment opportunities in California.
Related Link: 10 Farm Income Ideas for 2021
#4: Fantastic Portfolio Fodder
Investing in farmland is a great way to stabilize your investment portfolio. Key benefits to adding farmland to your portfolio include:
- High Return on Investment: Farmland real estate outperforms all stocks other than maybe the S&P 500.
- Reduced Volatility: Because farmland is rarely affected by market swings, it can help stabilize other market investments.
- Hedge Against Inflation: Land is always a good investment because it appreciates over time. And as the government policy increases inflation, farmland will offset more volatile investments that are affected by inflation.
By adding farmland to your portfolio, it can allow you to invest in other more riskier or volatile investment opportunities.
#5: Crossover Potential With Agricultural Technologies
A recent article in Forbes highlighted that new agricultural technologies would dramatically increase farm revenue. Each acre can now produce more because of advancements in everything from soil sampling, seeding, irrigation, and farming techniques.
Some of the latest advancements include:
- Artificial intelligence
- Robotic harvesting
- Autonomous Equipment
- Drones
- Remote operated tools
- Other learning technologies
The newest technologies improve harvest production, increase product quality, and reduce labor costs, creating higher returns per acre. By investing in farmland utilizing these technologies, investors will reap higher gains.
#6: Potential For In-Demand Niches
In 2020, there were 2.02 million US farms; this is a steady decline from 2007 of 2.20 million farms, with most farms averaging 444 acres. Net farm income forecasts show a 15.3% increase to $113 billion in 2021.
To capitalize on these returns, many farms are growing in-demand cash crops like:
- Coffee
- Corn
- Rice
- Soybeans
- Cotton
- Hay
- Wheat
Corn and soybeans production makes up 40% of all US crop cash receipts. Corn has the highest crop cash receipt of $46.7 billion, with soybeans a close second at $36.7 billion.
#7: Leading the Transparency Conversation
In today’s society, fueled by star-studded pop culture, agriculture has been under attack about providing more transparency about plant modification, animal treatment, gluten, and pesticides. Farms that adopt an open, transparent business model will gain more consumer confidence, secure loyal customer bases, and reap higher profits.
Farms can embrace a more transparent model by educating about business practices, following government laws, restrictions, and codes, and providing access to the farm to media and other interested parties.
Conclusion
Investing in farmland is an excellent real estate opportunity to diversify your portfolio with a stable, high-return, inflation-proof investment. What once was only accessible to the uber-rich, farmland is now a hot commodity among new investors who can purchase fractional shares through REITs or crowdfunding platforms.
Land Income has $29 million-plus in farmland assets spanning over 650 acres of land across California. Our farms’ average return is between 7%- 10%, which is well above the California average of 5% annually.
Land Income invests in efficient, low-cost operations that utilize the latest technologies to increase profitability and reduce annual operating costs. Check out Land Income’s current farmland investments and learn more about how you can invest.
Want more information about Land Income’s farmland investment opportunities? Contact Land Income to diversify your investment portfolio.
Related Link: What You Need to Know Before Investing in Row Crops and Permanent Crops
