July 09, 2020
The History - and Future - of American Family Farms
“Family Farms” have played an important role in US history, and remain a cornerstone of American culture. Even today, as the US continues to be the world’s leading exporter of agricultural commodities, a substantial majority of its farms are still family-owned.
Yet, farmland ownership and tenure in the US have undergone enormous change, with more disruption due in just the next couple of decades. Whereas the federal government once gave away land at little to no cost to frontier settlers looking to build a new life through agriculture, US farmland today is an increasingly scarce asset.
The country has rapidly urbanized, farms themselves have consolidated and increased yields to maintain profitability and meet the demand of a growing population, and young people have moved increasingly away from rural areas and farm life.
These changes have left behind a graying farming population and have set up a massive shift in land ownership. The American Farmland Trust estimated in 2018 that up to 370 million acres of farmland in the US – or nearly four times the total land area of California – could change ownership in the following 20 years. Whether due to inheritance or sale, this transition will undoubtedly reshape the relationship between farm operators and the land that they operate.
Equally compellingly, this presents a huge opportunity for new entrants to the farmland market, including non-farmers, to capitalize on farmland’s extremely favorable and stable returns as an asset, and to inject new capital into agriculture at a time when it is needed more than ever.
Below, we’ll dive into a few periods in the US farming history that shed light on the changes coming forth and what they mean for new investors.
The Homestead Act and American Agriculture’s “Family Farm” Foundation
Though hard to imagine today, it was only about 150 years ago that most of the western territory of the US was still mostly wild, unsettled land. As the territory of the US expanded westward, the federal government had to put all of its newly acquired land to use in such a way that the people could share in its bounty. Their solution, ultimately, came in the form of a seminal piece of legislation: The Homestead Act of 1862.
Signed into law during the Civil War by President Lincoln, the Homestead Act redefined the government’s attitude toward land tenure and catalyzed the expansion of agriculture across the country. Until then, land ownership across the US had been dominated by wealthy speculators, who would acquire land from the government and flip it to the highest bidder for a huge profit. The basic premise of the Homestead Act, however, associated “free land with free labor” – people working the land to earn a living – and allowed poorer, opportunity-seeking families to own their own farmland for the first time.
Anyone could file a claim for up to 160 acres of public land, put down an initial payment of $18, and provide a written promise to use the land for agriculture. Then, if they established residence and began cultivation, they would receive the title within five years.
Settlers on the western frontier took huge advantage: Overall, approximately 270 million acres, or 10% of the present-day land area of the US, were eventually settled under the Homestead Act’s provisions across 30 states. The law itself wasn’t repealed until 1976, over 100 years after it was signed.
Farmland in the 20th Century: Saturation, Consolidation and Economies of Scale
If the 19th century was defined by the expansion of family-owned farms across the country, the 20th century was defined by sweeping changes that drove American agriculture increasingly toward industrialized farming. Most of the homestead-era family farms had been established by the time of the Second World War, and little arable land remained in the US that could be brought under production. With no new land left to settle, farmers in the post-war era had to chase new profits through new means, including by increasing the size of their operations.
Advances in many types of agricultural technology accelerated this transition by bringing huge increases in gross productivity to agriculture. Farms could be planted, irrigated, fertilized, and harvested with much greater precision, seeding density, and efficiency than ever before. New plant breeding techniques and the use of synthetic pesticides made crops hardier and higher-yielding. Farming machinery became ever more powerful, efficient, and automated. But beyond just producing more output from the same area of land, technological changes – which were usually expensive – forced farmers who wanted to adopt them to find ways to do so on a large enough area of land to offset the cost.
Often, the most effective way to meet their need for additional land was to rent it from a nearby farmer who had found an off-farm source of income. By the early 1970s, the proportion of commercially operated farmland in the US that was rented, not owned, by the farm operator sat at roughly 40%.
Nowadays, farmland rental is common across all types of farms and farm sizes, even among what the USDA considers officially to be “Small Family Farms”. In fact, as of a 2014 survey, “Retirement Farms” - or farms whose operators have retired but maintain a limited amount of non-commercial production - were the only group with a majority of farms wholly owned by the farm operator. Over 50% of farms in all other categories were cultivating or grazing at least some rented land.
Meanwhile, the count of farms in the US decreased markedly during the second half of the 20th century. Smaller, less technically advanced farms became increasingly unprofitable, driving their owners to market their land either for sale or rental and seek another livelihood away from farming. Today, although over 90% of farms in the US still qualify as “family farms”, the total number of these farms pales in comparison to what it was a century ago.
Demographic Changes in 21st Century Farming Communities
Today, the farms that remain are characterized, above all, by the rapidly increasing average age of the people who operate them. As of the most recent USDA Census of Agriculture, there were twice as many principal farm operators over the age of 75 as there were under 35. Forty percent of US farmland was owned by people of retirement age. Meanwhile, their next of kin are leaving rural areas and settling in the suburbs or in cities at a historic rate.
While this younger generation may eventually inherit farmland through gifts, trusts, or wills of their predecessors, the fact that many tenant operators are also approaching retirement age means that many of these young farmland owners will have to look for new tenants to operate their land. If they cannot find one, many will likely elect to put their land on the market for sale.
On the other hand, for young and beginning farm operators, renting rather than buying farmland is usually the easiest way to get started in agriculture. By renting land, a new farmer can avoid the huge initial cost and debt burden of buying enough land to make operations profitable from the outset. Avoiding this burden also allows the new farmer to invest in machinery or productivity improvements to the farm that will improve profitability over the long run. Factors like these can be hugely helpful for building experience, especially for people without a farming background. Unsurprisingly, the 2017 Census of Agriculture also found that younger farm operators tend to rent a greater share of the land that they farm than older operators.
Non-Operator Landlords in Farming, and the Role of New Investors
These demographic and land tenure changes leave behind a gaping hole: If the younger generations of families who have owned farmland for decades are leaving farming altogether, but young farmers simultaneously would rather rent than buy land to get started, who will take up the mantle of farmland ownership and serve as the landlord?
More than likely, the most significant new entrants to the farmland market will be non-operator landlords – people who own farmland but are not actively involved in farming themselves. Increasingly, these will be people who don’t necessarily have farming backgrounds, and who will hire experienced operators to actually manage the day-to-day farm operations. This demographic is actually subject to many misconceptions about agriculture, from the non-farming population - we go and explore these myths in our previous article.
Non-operator landlords already accounted for 80% of rented farmland acreage across the contiguous 48 states as of 2014, and the total acreage owned by these landlords is only due to increase as the demographics of US farming communities continue to play out.
We’ve seen interest in investing in farmland grow rapidly among the non-farming population over the last several years, as this opportunity has become more well-recognized. We also see crowdfunding-oriented, fractional-ownership solutions as a huge enabling force for this shift – by allowing individuals to invest in shares of a farm, rather than buying a whole farm outright, we can enable a much wider range of people to take advantage of farmland’s promising returns as an asset class, and ultimately encourage the broader American public to consider becoming farmland owners.
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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