Historically, investing in farmland has not been something that has made sense for most Americans. The initial costs were high and investing required a deep knowledge of the agricultural industry. However, this is changing rapidly with new investment opportunities significantly reducing these barriers to entry.
Today, all you need to invest in farmland is a little extra cash and an investment account. While you can still invest the old-fashioned way, new opportunities are beginning to open up to the masses.
Why invest in agricultural land?
In the past, the only way to invest in farmland was to buy a farm or pasture and earn a return by tilling the fields or watching the land appreciate. This limited range of investment meant that investing in farmland only made sense for those who could produce from the land. For example, someone whose family has been farming for generations may have chosen to invest.
Now one can view farmland simply as an alternative investment. Farmland brings returns with both rental income and appreciation in the value of the farmland. So these investments can work somewhat like dividend stocks, with income gains and capital gains.
This combination of appreciation and annuity yields has resulted in consistently strong performance. For example, in the 20 years to 2020, farmland in the United States has produced an average return of 12.2 percent, according to AcreTrader, a land investment platform. Compare that to the average annual return of 10 percent for the Standard & Poor’s 500 index.
While stocks can be volatile, the fact that people still need to eat in good times and bad can help make for a more sustainable investment. This leads some investors to believe that farmland investments are recession-proof and won’t crash even when the stock market falters. Nevertheless, farmland can be an attractive alternative investment to help round out your portfolio.
How to Invest in Farmland: 5 Ways to Get Started
Gone are the days when there was only one way to invest in farmland. Investors now have many ways to get started with farmland, and the best choice for you depends on your situation.
1. Direct ownership of land
Option: If you want to invest in farmland, it is still possible to own land outright. In this case, you can buy the land outright and lease it to a farmer to use for his crops or livestock. So owning land directly means it will work as an investment property.
details: The capital required to purchase a farm can be quite substantial. For example, according to the USDA, the average farm size in 2021 was 445 acres. The USDA also reported an average price of $3,800 per acre in 2022. Using these averages, you can expect an average purchase price of $1.69 million per farm. Naturally, you may be able to start with less if you find the right opportunity.
2. Agricultural land REIT
Option: Real estate investment trusts (REITs) aren’t just for office buildings and apartment complexes. Indeed, REITs can also invest in farmland, and they are a popular way for investors to enjoy the benefits of real estate investing – specifically income – without the management headaches.
details: Investing in farm REITs has many of the same advantages as other types of REITs. For example, they facilitate diversification, they are much more liquid and the minimum investment is often much lower. And REITs enjoy no corporate income tax in exchange for distributing 90 percent of their taxable income to investors as dividends.
Gladstone Land (LAND) and Farmland Partners (FPI) are two of the most prominent farmland REITs.
3. Agricultural stocks
Option: One alternative to investing directly in farmland is investing in agricultural stocks. The idea is simple: instead of buying farmland, you buy shares in companies in the agricultural industry.
details: These agricultural companies may be involved in things like crop production, farm equipment manufacturing, and fertilizer production and distribution. Crop producers, for example, get a return on investment from the production of the land, and they may also own the land so that they can benefit from potential increases in land prices. Widespread agricultural stocks include Archer-Daniels-Midland (ADM), Corteva (CTVA), and Scotts Miracle-Gro (SMG).
4. Farmland Mutual Funds and ETFs
Option: While you can buy shares in individual agricultural companies, investing in something like a mutual fund or exchange-traded fund (ETF) is often easier. Some mutual funds are focused on agriculture, pooling investors’ money in activities that support the agricultural industry.
details: One important note is that farmland mutual funds do not always invest exclusively in agriculture and often invest in adjacent sectors. While this isn’t necessarily a negative, it’s worth keeping in mind if you’re specifically looking to invest in farmland.
Fidelity Agricultural Productivity Fund ( FARMX ) aims to invest 80 percent of its assets in agricultural productivity companies, and its largest holding is Deere ( DE ), the well-known name behind a lot of farm machinery. Keep in mind that mutual funds can come with high fees – so always check them before investing in any fund.
5. Crowdfunding Platforms
An opportunity: Farmland crowdfunding platforms are another way to invest directly in farmland, even if you lack the necessary capital. They allow you to buy a small part of a real farm, significantly reducing the minimum investment. These platforms include AcreTrader, FarmTogether and Farmfundr.
Details: Farmland crowdfunding platforms usually handle everything for you, from land selection to income distribution. Instead of buying an entire farm, you buy more affordable shares in a piece of land with other investors. For example, AcreTrader’s offerings typically start with a minimum initial investment of $15,000 – $40,000, according to the company.
However, keep a few things in mind with this strategy. For example, since you are investing in real farmland, the holding period is usually at least three to five years. In some cases, you may be able to sell your shares early, but this is not guaranteed. Also, investing in a single farm means you get less diversification than in other investments like farmland mutual funds and ETFs.
Bottom row
In the past, those looking to invest in farmland had few options other than buying an entire farm. But buying a farm is usually expensive and requires a thorough knowledge of the industry and its practices. While buying a farm is still an option, farmland investors now have many more options, including REITs, agricultural stocks, mutual funds and crowdfunding.
Editorial Disclaimer: All investors are advised to conduct their own independent research on investment strategies before making an investment decision. In addition, investors are advised that past performance of an investment product is no guarantee of future appreciation.