This article was originally published on Forbes.com
I recently attended the Global AgInvesting conference, where our company had a booth. While there were a few dozen U.S. farm investing funds there, I was encouraged to see how many pension funds and high-net-worth family offices were also there looking into farmland investment. One thing was apparent: Professional farmland investing is growing significantly. This is further reinforced by the involvement of large farmland buyers like Bill Gates.
To be clear, while agriculture/farmland-focused funds have grown assets under management by more than a factor of 8 over the past decade, according to Preqin data, this industry is still underprofessionalized when the $30 billion of investment assets is taken in context of the multi-trillion-dollar farmland asset class.
So why is this investment industry growing so quickly with professional investors? The conclusion seems pretty straightforward: strong historical investment returns, asset stability and portfolio diversification.
Farmland Investment Returns
Farmland has proven to be an attractive asset class for professional investors, with almost uniformly positive returns since the early 1990s. This is because investors can make money two ways: from the annual cash rent that farmers pay to use the land and also from steady increases in land values.
For example, consider a standard piece of farmland in the Midwest or the South. Assuming an annual cash rent of 4% and land value growth of 6%, the total annual return would be around 10%. For stable and productive row-crop farms, this would be considered normal or even attractive long-term returns in the current environment. On the other end of the spectrum, an almond farm in California may produce an 8% yield and annual land value growth of 4%, resulting in annualized returns of 12%. However, the latter example may have more volatility — swings in price and in the annual cash income.
Regardless of the above examples, it is important to note the investment gains are being discussed without the use of debt to amplify returns. When utilizing small amounts of debt that equate to lower loan-to-value ratios than typical real estate property investments, the return profiles of farmland investing can have less volatility than investments in residential or commercial real estate.
A core theme for professional investors in farmland is supply versus demand and the associated asset stability produced by it. Put simply, the amount of farmland in the U.S. is shrinking at a rate of almost 3 acres per minute. However, as the world’s population increases, food demand is growing.
Basic economics would suggest that the dynamic of shrinking farmland supply and increasing demand for food would lead to land values increasing in price. Indeed, this has proven true historically via steady increases in farmland value.
Farmland has shown itself to be an attractive investment candidate in its own right. However, agricultural land also has little or no correlation to most major asset classes, such as stock markets, bonds or gold. Thus some money managers have identified farmland as a useful portfolio diversification tool.
TIAA Nuveen published an informative white paper that shows “real assets” like farmland, timberland and real estate are effective investments for portfolio diversification. In its research, TIAA suggested that adding farmland to its model portfolio increased average annual investment returns while simultaneously decreasing the volatility of the portfolio.
An Underutilized Asset Class
Interestingly, despite these potential benefits, the number of investors involved in farmland remains small. The relative immaturity of farmland as a professionalized asset class is due to much of it being closely held, lack of transparency in the marketplace and the unfamiliarity of the asset among non-farmers.
The closely held nature of farmland has been a particular point of pain for investors. In fact, only 3% of U.S. farmland is owned by corporations. While almost 40% of farmland is rented out by its owner, most of those owners are individuals. Thus, investment funds and professional investors still only comprise a tiny slice of overall U.S. farm ownership.
Though professional ownership and investment in farmland is growing, the relatively small participation in the asset is one primary reason it hasn’t been widely invested in. Another reason is education. Organizations like Purdue University’s College of Agriculture and Agricultural Economic Insights spend time writing about farmland investing and the economics of agriculture, but it isn’t enough. The industry is beginning to get some attention, but financial journalists need to spend more time truly assessing and writing about this asset class for it to gain more mainstream notice.
While farmland has been relatively underutilized and non-publicized as an alternative asset class, it does seem clear why it is becoming more professionalized and sought after by big money managers. Farmland has mostly remained off the radar for mainstream financial news and press, but given growing interest in the asset class by investors big and small, expect to hear more about it soon.
To learn more about how you can invest in farmland, or if you have any questions, feel free to reach out anytime by calling us at (888) 958-1470 or by emailing us at info.acretrader.com.
Note: The information above is not intended as investment advice. Data in the charts above is sourced from Bloomberg and the National Council of Real Estate Investment Fiduciaries. 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 conditions.