November 08, 2019
What Is Commercial Agriculture And What Has It Enabled?
Farming and agriculture are some of the most ancient arts in history, dating back to 9500 BC. In fact, growing crops and breeding animals is believed to be what influenced the rise of civilizations!
A lot of time has passed since people first learned to grow cereal crops and raise livestock, but the importance of farming is only increasing as the population of the Earth continues to grow and the supply of arable land for growing crops continues to shrink.
What Is Commercial Agriculture?
As the world developed, farmers started to produce surplus food from agriculture, meaning that other people could work in industries unrelated to farming and simply buy food or exchange it for some other goods. This is how commercial agriculture started.
Unlike subsistence agriculture, where the food is grown to feed only the farmer and his family with little or no surplus, commercial agriculture is growing food for profit.
It is usually large-scale and produces crops and livestock for further distribution to retailers or wholesalers. Commercial agriculture involves complex business processes as well as advanced technological solutions to help farmers maximize their crop yields per acre of land.
Currently, American farmers produce 25% of grains on the global market and the US is the second-largest exporter of agriculture products.
Current Agriculture Issues
The global population is expanding, and supplying the growing demand is the utmost task of the agriculture industry today.
It is calculated that food production should increase by 70% by 2050 in order to feed our growing population. For this reason, paired with the fact that the amount of arable land continues to decrease (at a rate of 3 acres per minute in the US), the supply and demand function seems very favorable over the long-term for farmland investing.
Increasing production at this rate is not an easy task given all the modern challenges and issues in agriculture. Among the most pressing ones are:
- Shrinking supply of arable land: Soil degradation, natural erosion, and the use of land for urban needs like highways, factories, shopping malls, and housing has led to the loss of 345 million acres of agricultural land in the last 30 years in the US alone. These factors make keeping farmland in production and adopting sustainable farming practices very important topics for the future of agriculture.
- Consumer trends: As the global population continues to grow and income levels continue to rise around the world, we are seeing a rise in the demand for protein, which greatly increases the demand for crops used as animal feed. For example, producing one pound of beef requires six pounds of grain on average. By 2050, it is expected that meat production will need to rise by over 130% to meet these consumer demands.
Why Is Agriculture Important?
Apart from providing the entire world population with a crucial element of survival - food, agriculture has a direct impact on many other industries, making it a cornerstone of the economy.
More than 22 million people are employed in the US agriculture or agriculture-related businesses, contributing 5.4% of GDP to the economy of the country. Agriculture provides employment opportunities for millions of people in rural areas, improving their welfare and living conditions.
Close ties of agriculture with other industries make it paramount in their success and development. For example, transport, infrastructure, textile, and other industries that rely on raw materials produced by agriculture only exist in synergy with farming.
Surplus food produced by American agriculture serves as a catalyst for further economic development. The rise of commercial agriculture has supported the advancement of other industries such as manufacturing, banking, tourism, entertainment, etc. since the majority of individuals no longer have to rely on subsistence agriculture for their survival.
As you can see in the chart below, farm investments have offered average annual returns of 11.5% over the last 30 years from both land appreciation and income from the farming operation or cash rent payments from a farmer.
Another important consideration is that it has offered these attractive returns with very little volatility to other major asset classes.
While agricultural land is a less liquid investment than something like stocks or bonds, it can also be a great way to diversify your portfolio as it has shown little or no correlation to most major assets as well.
To learn more about the performance and characteristics of farmland investments read this article where we go into more detail on farmland as an investment opportunity or download our whitepaper below.
How to Invest in Agriculture?
We believe that the non-correlation of farmland to other assets, relative low-volatility of returns, increasing land values over time, as well as ever-growing demand for food, make farming and agriculture an attractive opportunity for investors. Here are some of the most popular ways to invest in a farm:
Purchase the farmland directly from the landowners and farm it yourself or rent to the farmers: This is the most traditional way, but not the easiest one due to large capital commitment, extensive knowledge required to choose a profitable piece of land as well as farm it, and time-consuming farm management for which one needs to be skilled. Initial investment starts from a couple of hundred thousand dollars and includes the purchase of land, equipment, insurance, supplies, etc.
Invest in farmland on agriculture-focused investing platforms: Another simple and more accessible way to invest in agricultural land is the use of farmland investing platforms such as AcreTrader. On the platform, an investor purchases shares in the entity that owns the farm and later receives annual income in the form of cash rent from farmers. Moreover, AcreTrader will competitively market the property at the end of a set holding period (depending on market conditions). At this point, you would also realize any potential gains from the appreciation of the underlying asset.
The second route provides direct access to farmland ownership without the extensive capital requirements and ongoing management of farm operations, making it a truly passive investment.
Agriculture Investment Opportunities
Finding a proper piece of land to invest in is one of the biggest challenges for investors. Investing in a farm is typically a long-term undertaking. When identifying a piece of investment-grade farmland, there are several variables one should consider, including, but not limited to:
Economic situation, prices for goods and raw materials
Land value appreciation rate
Local regulations and taxes
History of crop rotation
And many others
Thus, evaluating the land value properly is of the utmost importance for investors who want to find farm investing opportunities with the highest ROI.
Fortunately, we have simplified this task, as AcreTrader's due diligence process eliminates ~99% of the properties we review. The farm verification process is being conducted by professionals with extensive industry experience who analyze over 100 points of data on each farm.
Moreover, AcreTrader also takes care of all aspects of farm management, accounting, and administration, so when you invest in a farm through the platform it becomes a truly passive investment that is being improved when needed to maximize land values.
Agriculture in the US by State: Top-5 Rankings
Agriculture in America is an industry that is thriving thanks to suitable weather conditions, availability and fertile land, as well as accessibility of technologies and resources. Among the biggest agricultural states in the US are California, Indiana, Iowa, Kentucky, Michigan, and Nebraska.
However, to make a balanced investment decision, one should not only consider crop yields, available arable land in the state, or the number of farms.
AcreTrader has recently launched an interactive farmland value tool where you can find information on historical agriculture investment returns, as well as average farmland prices, rental rates, and cap rates by state.
According to the analysis, using data from the USDA, NCREIF, and other sources, over the last 20 years the states with the highest total annual returns in the form of land value appreciation and annual distributions have been:
- North Dakota - 14%
- Nebraska - 13.4%
- South Dakota - 12.2%
- Washington - 12%
- Iowa - 11.7%
In summary, commercial agriculture has supported significant economic advancements, a more sustainable food supply, as well as an attractive investment opportunity if you know how to identify high-quality investment opportunities and manage ongoing operations efficiently.
If you are interested in making passive investments in stringently sourced farms across the country, please visit our Investments page or take a look at our How It Works page and let us know if you have any questions!
Note: The information above is not intended as investment advice. Past performance is no guarantee of future results. For additional risk disclosures regarding farmland investing and the risks of investing on AcreTrader, please see individual farm offering pages as well as our terms and conditions.
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