October 12, 2023
How FarmTogether Is Expanding Access to the $3 Trillion Farmland Market
Private markets, such as private equity, venture capital, private credit, and real estate have catapulted to new heights over the past decade. It’s no coincidence—rather, it reflects the substantial influx of capital from power players, sovereign wealth, and institutional pension funds enticed by greater potential returns.
The entry of ultra-high net worth (UHNW) individuals has also contributed to this growth trajectory, with 84% of ultra-high net worth (UHNW) individuals having invested in private equity, for example, demonstrating their influence on these markets.
Simultaneously, advancements in investment platforms enabling access to various alternative assets have helped reduce investment barriers. Platforms like Yieldstreet offer access to many alternative assets with a simple-to-use dashboard and low fees. At the same time, Vinovest and Lobus provide investors with direct access to fine art and wine, respectively.
This shift is significant, especially as many investors are reconsidering the conventional 60/40 portfolio. This once-trusted strategy had its most challenging year in a century in 2022, plummeting 16% relative to its 10-year average gain of 6.1%. As investors recalibrate their long-term growth plans, the global alternative assets market has burgeoned, growing from $7.9 trillion in 2013 to over $10 trillion in 2020, with projections of reaching $14 trillion in 2023.
The farmland investing market, however, has not kept pace with these overarching trends. Despite the U.S. farmland market being valued at an impressive $3.3 trillion, and standing at 2.2 times the size of other U.S. real estate asset classes, investors own only 2% of the total market share. This number is starkly low compared to the institutional stake in other alternative sectors: approximately 16% in real estate, 14% in infrastructure, 12.4% in private debt, and 9% in natural resources.
Challenges in Sourcing, Underwriting, and Management
The last decade has seen institutional investors, like pension funds and tax-exempt entities, allocating an estimated $15 billion into farmland investments, with the current institutional stake estimated at $26 billion. Nuveen and Prudential (PGIM Real Estate) are noteworthy players, with farmland assets of $10.3 billion and $2.5 billion, respectively. Hancock, now part of Manulife Investment Management, is also a significant player in timberland and farmland assets, echoing their commitment to sustainable and community-centered practices.
While there’s been movement into the space, however, most asset managers have faced substantial challenges in assessing, acquiring and operating farmland. These challenges include:
- Off-Market Dominance: At least 30 percent of American farmland is owned by non-operators who lease it out to farmers, which suggests about ⅔ of all farmland sales occur off-market, limiting asset manager’s visibility into potential deals.
- Size Constraints: The majority of US farms are small to medium in size, with approximately 70% of farms valued at less than $10 million per FarmTogether estimates. These farms are not sizable enough for major institutions, which typically target deals above $20 million. As a result, these firms have struggled to source farmland transactions that meet their investment size criteria.
- Information Barriers: Farmland investing demands deep regional knowledge for accurate underwriting and modeling. Many asset managers lack this localized expertise, hindering their ability to properly value farmland and, in turn, transact.
- Complexity of Farm Management: Institutional investors often lack the expertise and infrastructure required to optimize agricultural operations. Moreover, it is difficult to identify experienced operators for specific crops and regions.
- Institutional Decision Delays: Larger institutions often grapple with extended decision-making processes, causing them to miss out on competitive opportunities.
In addition to the aforementioned challenges faced by asset managers, investors themselves have encountered obstacles when looking to add farmland to their portfolios. Several barriers to entry, including substantial capital requirements, have historically deterred participation in this asset class. Furthermore, there has been a lack of accessible investment options tailored specifically for farmland. While some options have been available, they often come with their own set of drawbacks:
- Pension Plans: Pension plans typically offer a range of investment products, but they often lack the granularity to address specific investor preferences, such as investing in particular types of crops or regions.
- Private Equity Funds: Private equity funds' high upfront costs could deter investors. They also offer limited control over property choices, and their leveraging strategies can introduce additional risks, including the possibility of defaults.
- Real Estate Investment Trusts (REITs): REITs, often susceptible to market and interest rate shifts, can introduce volatility. Their performance is also heavily tied to dividends, which fluctuate with the health of underlying assets, leaving investors with minimal influence over property management.
- Agriculture ETFs: Agriculture ETFs, especially those linked to commodity futures, have faced volatility challenges due to unpredictable supply and demand dynamics. They often had high expense ratios and liquidity issues, leading to wider bid/ask spreads.
- Outright Ownership of Land: While owning farmland directly can provide a high level of control, it also comes with substantial upfront costs. And, unless the owner actively develops or leases out the land, it can become a resource drain without immediate returns.
Where FarmTogether Fits
While farmland has proven to be a historically stable and strong performing asset class in terms of absolute returns over the past several decades, various historical barriers have hindered the asset’s widespread adoption among investors for decades.
FarmTogether is seeking to change this. By seizing untapped segments of the market, leveraging our deep industry knowledge and network, introducing new technology that fosters scalable sourcing, and offering flexible, tailored investment solutions, we’re helping to bridge the gap between this historically underutilized asset class and a wider range of investors.
Turning Small Deals into Big Wins
Breaking into the farmland market involves a strategic approach to deal sourcing and underwriting. Unlike institutions that focus on a fairly small segment of the market ($20m+), our investment strategy has honed in on a niche market with vast potential – small-to-medium-sized farms in the $2-15 million range. This segment not only boasts the highest transaction volume, but is also on an upward trajectory; as the average U.S. farmer nears 60 years old, an estimated 70% of farmland is expected to change hands in the next 20 years.
We’ve developed a highly organized system that has allowed us to navigate the inefficiencies of smaller transactions, especially in escrow periods and deal structuring. Unlike larger institutional players often burdened with narrow investment criteria and slower decision-making processes, our investment team is able to employ a higher level of agility that enables us to quickly capitalize on competitive prospects.
We leverage our proprietary sourcing technology, Terra, to help identify opportunities that align with our investment thesis. This tool utilizes data analytics, satellite imagery, and machine learning algorithms to assess the potential of farmland investments; this approach has allowed us to build a substantial pipeline of potential deals often missed by larger entities. To date, we've analyzed over 9,000 opportunities valued collectively at more than $22 billion.
This consistent deal flow has also allowed our team to be more selective when sourcing properties, quickly moving (or passing) on deals that align with our target geographies and commodities, as well as our specific product needs. For example, we’re able to prioritize West Coast permanent cropland, a highly specialized, high-value market that has been difficult for competitive buyers to enter. Nearly 60% of our portfolio is located within California, Washington and Oregon, totaling $144 million and accounting for 75% of our total AUM.
Expertise and Network
One of the key factors that sets our firm apart is deep-rooted industry expertise. Our investment team, boasting over $1.2 billion in collective capital deployed, leverages this experience across the investment process, from the initial sourcing to our meticulous due diligence. This has allowed us to hone in on the highest-quality opportunities within our target markets; less than 1% of all properties reviewed have eventually made it to our platform.
Our team’s extensive experience has also enabled us to build an expansive network within the agricultural sector and to establish key relationships with leading operators in our targeted crops and markets. These strategic partnerships with industry leaders like Citricare, Liberty, Stemilt, and Raptor have been key in identifying and acquiring high-value deals that are often off-market; to date, our partners have brought more than 50% of FarmTogether’s acquisitions.
We’re also able to leverage our partners throughout the underwriting process. Our partners are able to provide a more comprehensive view of the complex, localized market dynamics, while helping to mitigate operational risks more effectively.
Tailored Investment Solutions for Diverse Investor Needs
The complex nature of farmland demands a nuanced approach when making these investments more accessible and attractive to a wider range of investors. Unlike many existing investment products, which often come with rigid deal structures, FarmTogether embraces flexibility when calibrating risk profiles, return targets, and holding durations. This allows us to adapt and customize deal structures that better align with investor objectives, whether you’re seeking stable, long-term returns or looking for more growth-oriented opportunities.
We’re also able to foster a collaborative ownership model with our sellers. We work to ensure sellers can maintain a stake in the business, if and when desired, by tailoring the partnership structures, revenue models, and operational arrangements for each unique farmland transaction.
This flexibility extends to our product offerings, as well. We offer four diverse products – Crowdfunded offerings, the FarmTogether Sustainable Farmland Fund LP, Bespoke offerings, and Tenancy in Common (TIC) – that make it easier for individual investors, financial advisors, wealth managers, and family offices to seamlessly integrate farmland into their diversified portfolios. FarmTogether investors can build their own portfolio through our crowdfunded marketplace or work one-on-one with our team to identify a Bespoke offering customized to their personal preferences. Investors can additionally access a diversified portfolio of farmland via a single allocation through our Sustainable Farmland Fund. Moreover, FarmTogether’s Bespoke and TIC products can qualify for 1031 exchanges.
While farmland is still widely underutilized by most financial institutions and individual investors, we’re seeing a transformational shift in the market. Farmland investments are no longer reserved for a select few, but are increasingly becoming an accessible option for a wider array of investors looking to diversify their portfolios.
FarmTogether is leading the charge. Our flexible, customized investment solutions are expanding accessibility to a broad investor base, ushering in a new era for this historically superior asset class. In just four years, FarmTogether has amassed a robust portfolio, with over $180M in assets under management spread across 45+ properties, 8 states, 14 crop varieties and supported by 4 diverse product offerings.
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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