June 09, 2020
6 Benefits of Investing in Farmland
Investors are not for want of options with regard to how and where they can seek opportunities to make a return on their capital. For many, this takes the form of mutual funds, ETFs, real estate, stocks, and bonds. These are just some of the more common options, however—there is a world of other investment types. These other forms of investing, known as alternative investments, can offer value and growth in different ways than conventional, market-based investing can
The world of alternative investments is vast; finding the right one for your portfolio can seem overwhelming at first blush. If you’re looking to expand your horizons into a stable, long-term holding that combines the benefits of real estate, bonds, managed funds, and commodities, then farmland investing might be just the thing.
Farmland investing offers multifold benefits, including many of the characteristics of other well-known investment options. Better still, farmland investing has several advantages over other kinds of alternative investments. These can include higher value for your investment dollar, bigger yields, stronger diversification, or much more.
This is just the start in terms of the benefits of investing in farmland. Here are six of the largest benefits of farmland investing for the average portfolio.
1. Inflation Hedging
Finding good cover from inflation can be challenging enough for the average investor. Add market volatility and near-zero interest rates into the mix, and this task gets significantly harder. Savvy investors usually seek shelter by way of inflation-hedged investments. Essentially, these investments can provide a position that is either less affected or positively affected by inflation than your usual market pick.
In layman’s terms, these types of investments make sure that the value of your money remains the same as the cost of goods and services over time. These investments usually consist of tangible goods—be they houses, precious metals, farmland, or collectibles. These holdings increase in value when inflation strikes because their asking price increases as well. That means your inflation hedging investments can buttress volatility elsewhere in your portfolio, making it a crucial asset to hold.
There are two main competitors when it comes to inflation hedging investments: gold and Treasury Inflation-Protected Securities. Here’s how farmland compares to them both in terms of benefits and differences.
Farmland vs. Gold
Inflation tends to be good for gold, which means it could be a viable investment. Gold has a strong tendency to increase in value during inflation, which is great for investors who want to park some of their market gains in a stable investment during turbulent times. Two of the major reasons gold is such a popular pick for investors is its scarcity and its usefulness. Gold is a finite commodity, and scarcity helps dictate its value. There’s always a certain amount of demand for gold as well, as it plays a major role in electronics manufacturing in addition to jewelry. This is true whether or not inflation is on the rise: the need for gold stays the same.
Gold is far from the only (or best) inflation hedge. One of the major drawbacks for gold is its asking price. These days, gold prices are enough to give most investors sticker shock. This January, gold prices shot to $1,960.60 an ounce—a high not seen since November 2020. That means you’re not going to get a whole lot of gold in exchange for your cold, hard cash.
Farmland investing vs. TIPS
Treasury Inflation-Protected Securities, or TIPS, are another common option for inflation hedging. The interest rate on these bonds increases to keep pace with inflation according to the Consumer Price Index. This helps ensure that your bond provides some level of value to investors in the event that inflation wipes out interest-based gains.
At the same time, however, the interest rate on TIPS decreases if deflation occurs. You’ll lose out on the increased interest rate if the CPI falls before your maturity date, wiping out much of your appreciation in the process. Farmland value isn’t contingent on CPI inflation, which means you have a wider array of outcomes for your investing dollar.
Farmland also offers similar hold periods as treasury bonds, making it an excellent substitute for TIPS in your portfolio. Unlike with TIPS, the value of your investment isn’t tied into the CPI falling or rising, which takes some of the ambiguity away from your bond’s final total. Since farmland appreciates during inflationary periods, your investment will have more than just protection—it’ll have a thriving market that will let it flourish.
Farmland investing is a resilient and more cost-effective inflation hedge. Farmland value has kept pace with gold and Treasury bonds historically, but without the retail price one has to pay when making gold investments. When you invest in farmland, you’ll enjoy the inflation hedging benefits of gold without exchanging thousands of dollars for an ounce of metal. Instead, you can pick from a variety of farmland ownership opportunities that deliver the same hedge function, but with a greater variety of investment opportunities.
2. Favorable Diversity
Making sure you have a diverse portfolio is one of—if not the—most well-known piece of financial advice around. The more you vary your investment types and industry sectors, the less likely you are to get hit too hard with any singular investment. That said, there’s much more to diversification than that.
In fact, many investors may end up over-diversifying, or not actually diversifying their portfolio at all. Holding too many overlapping funds, or investing in funds that are over-invested across a swath of an industry, can eat away at your returns through fees and sluggish overall performance. Not including investments outside conventional markets is another challenge. By keeping all your investments in the market, you’ll miss out on the world of diversification that alternatives—and farmland investing in particular—can offer.
What makes farmland investing unique is its favorable diversification properties. That means farmland offers not just diversification, but favorable diversity as well. This is because farmland negatively correlates with other asset classes, and only slightly correlates with real estate. This means that farmland tends to perform well when the markets are down, and that farmland increases in value as inflation reduces the dollar’s purchasing power. Therefore farmland is said to enjoy favorable diversity as it does better when other common investments may falter in terms of value. Of course, this also depends on the type of farmland you choose to invest in. Different crops offer higher or lower cost of yields, and may be more or less subject to market volatility. Given past precedent, farmland value in general fares well during turbulent economic periods.
Every investor might want big returns, but every investor depends on stability. Not all assets appreciate the same way, and hardly any investment growth gets where it is on a straight trajectory. The goal of every investor is to maximize returns while mitigating risk. The best way to do this is through incorporating stable, steady gainers in your asset mix. That way you’ll have something to fall back on if your more aggressive holdings, like stocks, end up causing turbulence.
Farmland investing makes for an excellent, stable asset that belongs in any investor’s portfolio as a hedge against market volatility. Farmland has increased in value for the past two decades, even in the face of the 2008 financial crisis and housing bubble, as well as other turbulent periods. These returns have given farmland an excellent reputation for stable results across the long term.
One of the reasons farmland value remains so strong is its usage. Even when commercial or residential real estate markets are sluggish, or the economic ramifications from COVID-19 shake up markets, people still need to eat. And, as the saying goes, “No farms, no food.”
The demand for agricultural products will only increase over time. One recent study concluded that global crop demand will increase 100–110% between 2005 and 2050. The agricultural sector will need to do all it can to keep up, making farmland even more valuable than it is currently. This built-in market for farmland makes investing in farmland a stable asset with a proven track record and future demand.
4. High Yields
High-yield investments have a solid position in almost every portfolio. Long-term performance is great, but holding an asset that can deliver consistent yearly income is even better. Farmland’s stable performance, built-in demand, and inflation-proof attributes have make it a great option for investors who want a high-yield asset.
Farmland has produced high yields for investors during the past two decades. In fact, row crop farmland has consistently produced cash income of between 4 and 8 percent, which is rare in the world of dividend-bearing investments. These gains don’t just come from yearly crop yields, either. In fact, billboards, hunting leases, timber sales, and renewable energy all contribute to many farms’ income. As a partial owner, this income translates into a high-yield investment within your portfolio.
Farmland has consistently yielded returns over 10% for the past decade, even accounting for factors such as crop yield size, crop prices, weather conditions, natural disasters, and more. This means that cropland has a proven track record of steady performance even when external conditions pose challenges within the agricultural sector. So if history is any indicator, your investment in farmland is likely to enjoy comparable growth if current conditions hold.
Not only does farmland offer consistent yearly returns, its totals often exceed those of other dividend-bearing investments. The average dividend-producing stock in the industrial goods sector is a meager 1.76 percent, while industrial stocks listed in the S&P 500 topped out at 2 percent in most cases. This means that your typical farmland investment is going to outperform a dividend-bearing stock by two to three times on average—making your money work harder for you all the while.
5. Built-in Scarcity
When you invest in gold, you’re investing in a finite resource. The amount of farmland in the United States is decreasing every year, and yet the country’s farms make up 10 percent of the world’s farmland. Coupled with a growing population and a demand for food that’s not decreasing anytime soon, the need for farmland is only going to increase over time—even if there’s less of it than ever.
One of the things that makes gold expensive is its scarcity: there’s only so much of it in the world, be it discovered or undiscovered. Even when new sources are uncovered, the general trajectory of gold’s value trends upward. Farmland has built-in scarcity as well, albeit without the likelihood that large swaths of land will convert from residential property to new farms. This means your investment in farmland today will expose your portfolio to an asset class that will become all the more valuable over time as modern farming—and the farmland on which it happens—evolves to meet new challenges.
At present, agriculture accounts for $992 billion in the U.S. economy every year. And yet, only 17 percent of the country’s land is dedicated to farming. When you invest in farmland, you’re investing in a commodity that is as precious as gold, albeit without the sticker shock. Farmland has much more room to run in terms of appreciation as well, which means your investment in this scarce resource has several advantages that other, similar investments can’t match.
6. Multiple Revenue Sources
Farmland is a unique investment insofar as it has multiple income sources. The value of the land itself is perhaps the largest source of potential income for investors, but it’s far from the only one. When you invest in farmland, you’re also opening up your portfolio to gains through other revenue streams. For example, you’re entitled to a share of the profit when goods go to market, and enjoy a stake in the farm upon which the land sits. When either of these two generate income or revenue, a portion of that goes to you as a partial owner.
There are also other ways in which farmland can produce value for an investor. The renewable energy boom throughout parts of the United States requires large swaths of land for wind turbines and solar panels. Farmland has proven to be an excellent place to build both.
Better still, these installations can also yield cost savings for farmers. For example, wind turbines can help pump water for irrigation and fulfill power needs on a farm. This reduces overhead and can help increase margins come harvest time. Plus, these installations provide year-round revenue for farms. This can help offset the financial toll of a bad harvest year or an oversaturated market that drives down the price of goods.
Farmland is a Sound Investment
Farmland is a unique investment for several reasons, each of them offering a distinct advantage for just about any portfolio or goal. When you invest in farmland, you get the best of several other asset classes put together: you’ll enjoy the stability of gold, better returns than Treasury bonds, better diversification than investment funds, and more in-demand real estate asset than commercial or residential real estate. Plus, farmland has been a steady gainer for decades, meaning your investment is likely to weather just about any kind of economic turbulence.
Apart from all the traditional factors concerning investment opportunity, investing in farmland allows individuals to finally have a say in the way our food is produced, extracted, and distributed. As farmers hand their generational land down to children who sell it, corporations are increasingly taking over the world’s agricultural landscape. As Roberto Ferdman at the Washington Post describes it, “today’s farms are fewer and bigger.”
Investing in farmland allows us to push the boundaries of agriculture. It allows us to try new things and create a better world through sustainable, eco-friendly practices. And finally, it allows us to put the fruits of our collective labor back into our own hands.
At FarmTogether, that is our vision. With over 70 years of collective experience across farmland investing, agriculture, and real estate in the US and globally, we know what we’re talking about.
We firmly believe that farmland is a safe, stable, and attractive long-term investment for almost any investor.
Disclaimer: FarmTogether is not a registered broker-dealer, investment adviser or investment manager. FarmTogether does not provide tax, legal or investment advice. This material has been prepared for informational and educational purposes only. You should consult your own tax, legal and investment advisors before engaging in any transaction.
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