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Farming Fundamentals

January 15, 2019

Why Do Owners Sell Farmland?

We at AcreTrader are borderline obsessed with farmland investing. Along with steady income from cash leases and rising land prices, there are countless other reasons to consider investing in farmland and holding it as a long term investment. Underlying this belief, however, is an important consideration: for every buyer there must be a seller. If farmland is such a great asset, why would someone ever sell it? Are buyers taking advantage of owners who should not be selling? No! There are many good reasons to sell land. Beyond circumstantial reasons, there are several financial incentives and structural benefits that lead people to sell farmland when the time is right for them.

Financial Reasons Owners Sell Farmland

The first and most obvious is the right price. There are times when a piece of land is just worth more to a buyer than it is to a seller. If this is the case, then why wouldn’t a landowner sell their asset? Sometimes a seller just wants to realize their gains in asset appreciation or trade land for cash to invest in another opportunity. A frequent circumstance also occurs when a landowner has found another investable property and wants to sell out of one piece of land to invest in another. Often farm owners are able to purchase land they have long sought, land in a more suitable location, or a larger piece of land into which they want to invest the equity they have built in a different property. They will then sell their original property and use the proceeds to fund the purchase of the next one.

Structural Reasons Owners Sell Farmland

Other reasons to sell land may be structural. For instance, there are times when land has been passed down through multiple generations and there are as many as 40 or 50 owners. A family this big may not be interested in personally handling the management of an asset for the return they get on it. Or one of those family members may want to buy the land from the rest. Problems arise when there are many owners without a defined plan for management. Often, it can be better to sell a property rather than trying to align ownership interests among a large group of people. Another structural issue occurs when a land owner buys a farm with several large tracts of land and a small satellite tract. The owner may want to keep the larger tracts but not want the smaller one. This situation provides a great opportunity for farmers in the area as well as strategic investors to gain a valuable asset while solving a problem for someone else. Specified holding periods can be another structural reason for land sale. When a farmland investment fund is formed, it has a limited timeline and must sell the land it owns in order to give money back to investors. In these cases, farmland funds may sell to a competitive fund, to friends in the industry, or even to the next in their series of funds.

Conclusion

AcreTrader works with landowners selling farmland for all kinds of reasons. We understand that transactions can be complicated, and we are unique in that we can allow for more flexible ownership structures. We also often find sellers with nonstandard property types that may fit our investors’ needs better than their own. Farmland investors are fortunate to be in an industry where all parties in a transaction have the opportunity to make money. With appropriate holding periods and a fair purchase price, land has performed very well over time. This allows AcreTrader and our investors to be great partners for people who know it is the right time to sell their land.

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The AcreTrader Relative Risk Score (ARRS) is a score we designed internally to judge the relative (not absolute!) risk of various offerings reviewed for listing on our site. While we share this score with our users regarding specific offerings, please note the ARRS is not to be relied upon as a single determinant of risk. Additionally, note the information below is not intended as investment advice. Please see disclosure of additional risks here.

What is Relative Risk?

Put simply, standard investment risk and return usually share a somewhat inverse correlation; the lower the risk of a given investment, the lower the expected return, and vice versa. Government bonds for example, are often seen as low risk, but they offer low returns. Inversely, speculating on currencies in developing countries or typical equity crowdfunding may offer high potential returns, but often come alongside high risks.

Agricultural farmland has historically shown what we view as impressive returns alongside relatively low risk (check out our white paper for more info). However, not all farm investing or general crowdfunding opportunities are created equal. Thus, we created 3 basic questions to help us determine our AcreTrader Relative Risk Score (ARRS):

  • Is there existing or planned debt on the subject investment property?
  • Are there necessary or planned improvements for the property?
  • Are there additional business risks (non-core to farming)?

Examples of the AcreTrader Relative Risk Score

Based on the simple yes or no answer to the above questions, we then describe the project's relative risk as one of four categories:

  • A Low ARRS means a "no" answer to all of the above questions. While these properties will typically have a lower IRR, this comes with a low risk relative to other properties we have reviewed.
    • An example might be an existing corn farm with no debt, no external businesses and no planned improvements.
  • A Moderate ARRS means a "yes" answer to one of the above questions. This type of farm may offer a slightly higher IRR.
    • An example of a moderate relative risk farm would be an existing farm where there is a planned investment in improving the grade of the land, but the project is funded with cash raised up front.
  • A High ARRS means a "yes" answer to two of the three questions.
    • An example might be the same farm above with planned investments, but the project is funded with debt in order to increase returns. While the IRR may be increased via debt (as opposed to using up-front cash from investors), the risk profile is potentially higher as well.
  • A Speculative ARRS means a "yes" answer to all three of the questions. These properties will typically offer the highest IRR but come with the highest risk relative to other properties.
    • An example might be a farm with an attached dairy operation, where debt is issued to improve the property and the dairy business output. Most of the real estate crowdfunding deals we see on the major crowdfunding sites would fall into this "Speculative" category given often high levels of leverage, complex organization, "value-add" necessity, and/or other potential business risks.

Conclusion

To summarize, there is no "one-size-fits-all" in investing, and this holds true with farmland as well. While many farms are lower relative risk, this comes with a lower potential IRR. We don't view agriculture and farmland as a get-rich-quick scheme, but rather as a conservative way to earn attractive risk-adjusted returns.


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 disclosures.

A Brief Explanation of the AcreTrader Relative Risk Score (ARRS)

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Farmland Ownership in 3 Charts

One of the most frequent questions we get is “Don’t farmers own all of the land they farm?” The short answer is no, but farmers are often looking to grow their business by farming more acres. They already own the tractors, have employees, etc., so many of them end up renting land they don’t own to farm. In fact, almost 40% of all farmland is rented out per USDA research.

Chart 1: Only 61% of U.S. Farmland is Owner-Operated pasted image 0.png

The chart above shows 61% of crop land is owner-operated (typically not rented or leased). However, much of that land is only partially owned by the farmer. Often cousins, siblings and even neighbors will own land together. In reality, situations in which a farmer owns cropland outright make up a much smaller percentage of land.

This is one of the many ways AcreTrader helps farmers and landowners. Individuals selling a minority share of a property join with buyers wanting to be aligned with long term owners. Often, land is partially owned by the farmer operating the land and a few relatives, and we can provide an attractive solution for all parties involved.

Breaking down Chart 1, Chart 2 below shows that the majority of non-operator landlords are actually individuals owning whole parcels.

Chart 2: Most Non-Operator Owners are Individuals or Partnerships pasted image 1.png

While 21% of farmland is owned by individuals and partnerships, an even smaller amount is owned by corporations, trusts or others. However, companies and trusts are often set up for those who inherit land and no longer live near a farm. Thus, for argument’s sake we could say less than 5% of US farm land is owned by professional or semi-professional investors.

In what other asset class is less than 5% of a several trillion dollar market owned by professional investors? And, why don’t more investors own farmland?

We believe high barriers to entry keep most people out of this asset class. For most, buying an individual farm is too expensive, the asset is illiquid on its own, and good deals are hard to identify.

Chart 3: Buying Farmland Directly is Very Difficult pasted image 2.png

Despite the historical difficulty of investing directly in land, it is an attractive asset class that has appreciated greatly over time and often protects capital during times of economic turmoil.

This is where AcreTrader comes into play - we allow investors to own farmland without the traditional frictions and headaches. It is simple - buy shares of land on AcreTrader and receive annual rent from the farmer while the underlying land increases in value over the long-term.

Note: The information above is not intended as investment advice. Data in the charts above is sourced from the USDA, Economic Research Service and National Agricultural Statistics Service, 2014 Tenure, Ownership, and Transition of Agricultural Land (TOTAL) survey. Data excludes Alaska and Hawaii. Additional calculations and analysis performed by AcreTrader. 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 & Disclosures here.

Who Owns U.S. Farmland?

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There are no guarantees in life, especially when it comes to investing. Recent surges in market volatility for stocks and bonds serves as a fresh reminder that asset prices don’t always go up. Can farmland save us?

In short: there are no guarantees in investing, and past performance is not a guarantee of future results. With that being said...

Farmland prices historically have no relationship with stock market returns and have offered a highly attractive way for investors to diversify their portfolios.

Farmland Prices and Stock Prices Move Independently

Look at the chart below showing the relative movement between United States farmland (the green line) and the S&P 500, a primary equities index (red line). What do you notice about the correlation between the two? pasted image.png

To be statistically precise, the correlation between these two asset classes is -0.03. Said differently, there is zero statistical evidence that stock market prices influence farmland prices and vice versa.

The lack of correlation alone suggests that farmland is a great portfolio diversification tool. In a world where most other asset classes increasingly move together, farmland helps mitigate the risk of financial loss in all assets at once. Additionally, the relative movement in the chart above demonstrates two other very important points.

  1. Stocks are volatile. Yes, this is known, but it is fascinating to see the annual gyrations between positive and negative annual returns from the stock market. Swinging between 30% returns and 40% losses isn’t for the faint of heart.
  2. Farmland is a much more stable asset class. Note that the volatility in the green line is just how much is made each year in farmland. Said differently, the returns of a farmland investment over time have oscillated between making small returns and large ones, not between huge profits and massive losses like the stock market saw in the early 2000’s or the great financial crisis. To learn more about the historical investment performance of farmland, please see the for investors section of our website. To learn more about our current offerings, please click here.

Note: The information above is not intended as investment advice. Data in the charts above is sourced from Bloomberg and NCREIF. Additional calculations and analysis performed by AcreTrader. 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 disclosures.

Can Farmland Protect You From Stock Market Volatility?