Why Would You Invest in Farmland?
Isn’t farmland that asset class reserved for, well, farmers? The truth is, farmland has been a very profitable and stable asset class for some of the wealthiest investors in America for decades. It is also a little known secret to most main street investors and advisors alike.
So what makes farmland such a great investment? There are a few key factors that contribute to the viability of this asset class and they are; scarcity, income, and application.
Almost more than any other asset class, farmland is scarce, unlike real estate, there are not new farms being plotted and plowed everywhere you look, in fact you might say that real estate and farmland are somewhat in conflict with each other in that farmland can be sold off to be developed for real estate purposes but the reverse is almost never the case.
The amount of farmland is actually shrinking every year. Total land in farms, at 897,400,000 acres, decreased 2,100,000 acres from 2018 to 2019, according to the United States Department of Agriculture. Both public and private entities push for infrastructure and real estate development which is often at the expense of farmland or farmable land. At any rate, farmland is scarce and almost finite at this point unless we figure out a way to farm Mars, it doesn’t look like a considerable amount of land will be coming on the market anytime soon. This means that the farmland left and available will continue to appreciate in value.
Much like a value stock, farmland yields income along with capital appreciation. While traditionally income yielding investments like the aforementioned value stocks or even bonds typically have less capital appreciation potential, farmland is unique in that it’s income and appreciation tend to be pretty stable over the years. We have seen historically though that farmland does farewell when the stock market is in disarray like we saw in 2008/2009. Farmland had an annual return rate of over 6% between 2008-2009, while the S&P500 was down over 36%.
The application of farmland is pretty straightforward, farms grow food. When you compare farmland to an asset class like real estate, you can see that application does indeed matter. For example, during the recent lockdown, people began to realize that commercial real estate can be optional for certain businesses as we saw with more and more companies allowing for remote work which led to companies needing less and less commercial real estate. So far, no one has been able to prove that people don’t need food and obviously we anticipate people needing food for many years to come. Coupled with the growing population, the demand will be high, while the supply could be low, creating a price increase as well.
You can probably tell by now that we are bullish on farmland and believe that this asset is often overlooked and underappreciated. If you are looking for an investment that allows for long-term capital appreciation, a strong use case, and income generation along the way, you should speak with an independent advisor about investing in farmland today.