Investing in Farmland vs Investing in the Stock Market
Most investors have some working understanding of how the stock market works; the same likely can't be said about farmland investing. You’d be forgiven for not knowing how farmland investing works if you’ve never come across the opportunity to do so—or if you haven’t explored opportunities in alternative investments much before.
The good news is that investing in farmland versus investing in the stock market isn't dramatically different. If you know how to keep tabs on your portfolio and the financial indicators used to track performance, you’re well on your way to understanding farmland investment opportunities.
On the other hand, however, there are also several differences between these asset classes, how they've historically performed, and key aspects unique to each investment. Thus, if this is your first time diving into the world of alternative investments, or you’re looking for a new alternative investment to add to your mix, here’s what you need to know.
What Makes Farmland Investing Different From The Stock Market Investing?
The stock market is far from a singular entity, especially when it comes to the allocation of the funds in your portfolio. Most investors have a blend of stocks, bonds, mutual funds, and exchange-traded funds. Here’s how farmland investing compares to each of them.
Farmland Investing vs. Stocks
Farmland investing and stocks differ greatly in terms of how they work and the value they provide within an investor’s portfolio. Stocks can serve as long-term holdings that deliver value over a long period of time, or can be a short-term holding that’s designed to generate a return quickly.
The overall value of the market often plays a role in a stock’s performance as well, meaning that your return is likely to fluctuate and may be difficult to pin down. In 2020, the S&P 500 index dropped 34 percent within the first 33 days of trading on the year. Although the index went on to regain much of what was lost, the disruption was enough to shepherd in volatile conditions for the rest of the year to come.
Farmland investing differs from stocks for these and other reasons. They’re low-volatility, meaning that they likely won’t give you the same ups-and-downs that pervade the market right now. External factors that drive down stock prices don’t tend to impact the value of your farmland investment, either. Each farm is unique, and so too is each farmland investment opportunity. Better still, farmland tends to fare better when inflation is on the rise. As producers of grain and agricultural products, farms benefit from the increased prices that come alongside inflation, which means you may benefit as an investor as well.
Farmland Investing vs. Bonds
Bonds and farmland investing have several things in common, even if the role both of them play in a portfolio are significantly different. Bonds give investors a long-term place to park their cash that offers a set return from the onset. The interest rate that comes with a bond relies on several factors, chief of which are the length of the term and the company or municipality offering the loan. Government bonds currently offer yields that vary from .06% to 1.62% based on the length of the bond. Bonds that last longer before an investor can reap their return come with higher yield, whereas bonds with shorter terms offer less for investors.
Farmland investing beats bonds at the moment due to several factors. The most important difference-maker between farmland investing and bonds comes down to yield. Ten-year Treasury yield bonds sank to their lowest percentage point in May 2020, dropping to .52%. Although the value of a 10-year Treasury bond has increased since then, it has only risen marginally. Farmland investments with FarmTogether, on the other hand, offer an average cash yield of 3 to 9%. These opportunities, like bonds, come with varying target hold dates—this means you can park your cash in a farmland investing opportunity just as you would with a bond, but at a much higher yield.
Farmland Investing vs. Mutual Funds and ETFs
Mutual funds and ETFs are a staple of just about anyone’s portfolio. Just under 50% of all assets in the market are within mutual funds, in fact. They offer a low-volatility solution for moderate growth through a crafted set of investments, typically administered by a fund manager who either takes an active role in buying assets for the fund, or who follows indices in order to create a return. You may not make a blockbuster, market-beating return with mutual funds—in most cases, your investment will keep pace with inflation. These funds do, however, offer you security and less volatility than direct stock exposure does, which can be a great hedge against market volatility.
Farmland investing has benefits that are similar to what mutual funds offer. They’re both stable investments that can offer protection from market volatility, albeit to different degrees. Mutual funds can help act as a stabilizing force in your portfolio by offering a wide swath of exposure to several stocks and industries. But, as mutual funds are still inherently tied to the markets, they still have market exposure that may result in some unavoidable amount of volatility. Farmland, on the other hand, is an alternative investment class that also offers investors a safe refuge from volatile markets. Better yet, farmland and crop value increases when inflation is on the rise, which can help offset market-related losses elsewhere in your portfolio.
The Pros of Investing in Farmland vs. the Stock Market
There are several advantages that farmland investments have over stock market investments. As an alternative asset, farmland investing gives you access to an opportunity to make a return that’s not tied to market performance. This can be a major benefit to investors that might be over-reliant on Wall Street gains to propel their portfolios. With economic jitters abound, there may not be a better time to seek shelter through an asset class that’s outside a shaky market.
With farmland investing, you’ll also avail yourself to an asset class that has a track record of maintaining value irrespective of the ups and downs of the economy. Plus, agricultural goods and commodities tend to increase in value during inflationary periods, which bodes well for farmland investors that are entitled to a percentage of the revenue from harvest (which FarmTogether’s investments provide).
Farmland investing offers a remarkable opportunity to diversify your holdings. You’ll get the perks of real estate investing, the security and confidence of gold investing, and a vital piece of your recession and inflation-proofing financial strategy.
The Cons of Investing in Farmland vs. the Stock Market
Although farmland investing is typically a strong option for most investors, there are a few considerations to factor in if they apply to you. First, you’ll have to make sure you have at least $15,000 to invest. FarmTogether is only open to accredited investors, and you’ll have to be able to put up at least this much to get started with your first investment.
Next, you’ll have to think of timing and how it relates to your portfolio. If your investing strategy relies upon a quick return on what you put in, farmland investing might not be a fit. Farmland investments usually require several years before investors can reap the full financial rewards of what they put in. So if you’re looking to make money fast, or do not have 5 or 10 years to drop into an investment, farmland investing may not be a great fit.
How to Know if Farmland Investing is Right for You
Every kind of investment offers a different proposition for your portfolio. Some reward patience and long-term plays, while others favor those who can act fast and take advantage of small market movements. Others sidestep stock exchanges entirely, relying on other means of providing investors with an opportunity to increase the value of their portfolio. Ultimately, a mix of these opportunities can provide much more upside for one’s holdings than playing it straight with a handful of holdings.
That’s where farmland investing provides investors with a unique opportunity—a historically stable asset class that provides financial hedge against market volatility, inflation, and other pricey alternatives like gold and precious metals. Plus, with FarmTogether, you’ll get to choose from a variety of vetted investment opportunities picked by our team of experts.
Interested in learning more about farmland as an investment opportunity? Check out two of our articles that break down institutional investments in farmland and how investing with FarmTogether works.
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.