5 ways to invest in farmland
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Historically, investing in farmland was not something that made sense to most Americans. The upfront costs were high, and investment required an intimate knowledge of the farming 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 some extra cash and an investment account. While you can still invest the old-fashioned way, new opportunities are beginning to open up for 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 from cultivating the fields or watching the land increase in value. That limited scope 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 would have chosen to invest.
Now one can consider farmland simply as an alternative investment. Farmland yields returns with both rental income and appreciation in the farmland’s value. So these investments can work somewhat like dividend stocks, with gains from income and capital gains.
This combination of appreciation and rental yields has resulted in consistently strong performance. For example, in the 20 years to 2020, farmland in the United States produced average returns 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.
Although stocks can be volatile, the fact that people still need to eat in good times and bad can help guide a more resilient investment. This leads some investors to believe that farmland investments are recession-proof and won’t crash even when the stock market falters. Either way, farmland can be an attractive alternative investment that helps 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. Now investors have many ways to get started with farmland, and the best choice for you depends on your situation.
1. Own land directly
Opportunity: If you want to invest in farmland, it is still possible to own land directly. In this case, you can buy the land outright and lease it to a farmer who will use it for their crops or livestock. So, owning land directly means that it will work like an investment property.
Details: The capital required to buy 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 cost of $3,800 per acre in 2022. Using these averages, you can expect an average purchase price of $1.69 million for a farm. Of course, you might be able to start with less if you get the right opportunity.
2. Agricultural land REITs
Opportunity: Real Estate Investment Trusts (REITs) aren’t just for office buildings and apartment complexes. Indeed, REITs can also invest in farmland, and this is a popular way for investors to enjoy the benefits of real estate investing – especially income – without the headache of management.
Details: Investing in farm REITs has many of the same benefits as other types of REITs. For example, they make diversification easier, 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 Corp. (LAND) and Farmland Partners Inc. (FPI) are two of the most prominent farmland REITs.
3. Agricultural supplies
Opportunity: One alternative to investing directly in agricultural land is to invest in agricultural shares. The idea is simple: instead of buying agricultural land, you buy shares in companies in the agricultural industry.
Details: These agricultural companies can be involved in things like crop production, agricultural equipment manufacturing, fertilizer production and distribution. Crop producers, for example, make a return on investment from the production of the land, and they may also own the land, so they can benefit from the potential increase in land prices. Widely held agricultural stocks include ADM ( ADM ), Corteva ( CTVA ) and Scotts Miracle-Gro ( SMG ).
4. Farmland mutual funds and ETFs
Opportunity: While you can buy shares in individual agricultural companies, it’s often easier to invest in something like a mutual fund or exchange-traded fund (ETF). Some mutual funds have a farming focus, pooling investor money into activities that support the agricultural industry.
Details: One important note is that agricultural mutual funds do not always invest exclusively in agriculture and often invest in adjacent sectors. Although this is not necessarily a negative, it is worth bearing in mind if you are specifically looking to invest in agricultural land.
The 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 agricultural machinery. Note that mutual funds can have high fees – so always check before investing in any fund.
5. Crowdfunding platforms
Opportunity: Farmland crowdfunding platforms are another way to invest directly in farmland, even if you don’t have the necessary capital. They allow you to buy a small piece of a real farm, which significantly lowers the minimum investment. These platforms include AcreTrader, FarmTogether and Farmfundr.
Details: Farmland crowdfunding platforms generally handle everything for you, from land selection to revenue distribution. Instead of buying an entire farm, you buy more affordable shares in a piece of land with other investors. For example, offers on AcreTrader tend to 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, because you are investing in real agricultural land, the holding period is usually at least three to five years. You may be able to sell your shares earlier in some cases, but this is not guaranteed. Investing in a single farm also means you get less diversification than in other investments, such as farmland mutual funds and ETFs.
In the past, those looking to invest in farmland had few options other than buying an entire farm. But buying a farm is generally expensive and requires intimate 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 investment product performance is no guarantee of future price appreciation.