Investing in Farmland: A Real Estate Investor’s Guide
There are approximately 911 million acres of farmland in America, according to the U.S. Department of Agriculture (USDA). Farmers and ranchers own about 61% of the land they use, renting the rest from third-party landlords. While other operators own 8% of this Farmland investors groups (including retired farmers) hold the remaining 31% of America’s farmland, with 21% owned by non-operating individuals or partnerships and 10% held by corporations, trusts, or other owners.
Given this breakdown, non-farming investors own a small slice of the country’s farmland. That piece, however, has been growing as more Farmland & agriculture investors acquire productive farmland as part of their investment portfolios. This guide will break down why investors are choosing to buy farmland as well as the growing number of ways to add this asset class to a portfolio.
Why invest in farmland?
The primary reason more investors are turning to farmland as an investment opportunity is that it has a long history of producing solid returns. Those returns come in two forms:
- Increases in farmland values.
- Crop yields or cash rental payments.
Over the last 50 years, the value of American farmland has risen by about 6.1% per year, with only five down years during that period. Add in the cash rent yields, and the return to investors has been even more impressive. Since 1991, farmland has produced a positive return every year, generating an average annual return of 11.5%, according to the USDA. To put that return into perspective, it has outperformed all other asset classes except the Dow Jones REIT Index during that time frame. In addition to the above-average total return potential of owning farmland, it provides investors with several other benefits:
Low volatility: Farmland returns have historically had less volatility than most other asset classes, including the 10-year U.S. Treasury Bond, S&P 500, gold, and Dow Jones REIT Index. Low correlation: Farmland returns typically don’t move in the same direction as the stock market. In many years, farmland has produced a positive return in a year that the S&P 500 has lost value.
Inflationary hedge: Farmland is a real asset that produces commodities like corn and grain. As such, it benefits from inflation since that would boost not only acreage values but also crop income. Because of that, some call farmland a gold-like investment with a yield.
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