Farmland investments take root
As Arkansans, most of us know someone who owns some farmland. Agriculture is the largest industry in the state and for many is part of their family’s heritage, yet almost all of us drive past it without a second thought. When we do think about land, it is often as a place we would visit or even as a place that grows food for American families.
But what about farmland as an investment? At first consideration, it seems so dull. How could you even make any real money owning farmland?
Investment funds focused on farmland are managing upwards of $30 billion at present, and that amount is growing quickly. They might like to keep their secret and tell you it is not an exciting investment. That’s because, surprisingly, farmland has outperformed most major asset classes over the past 20 to 30 years. That’s according to the National Council of Real Estate Investment Fiduciaries, which has been tracking farmland investment performance since 1990.
Further, farmland has produced returns of almost 12% annually without the significant swings in price typically seen in other forms of investment like stock markets, bonds or even gold.
The attractive return profile of farmland is in part because landowners can make money two ways: through the cash the farmer pays in rent every year plus the growth in the value of the land. Rents have historically grown steadily. Given that almost 3 acres of farmland are lost every minute in the U.S., the shrinking supply of farmland has helped contribute to consistent appreciation in the value of the land itself.
How might the investment returns of farmland stack up to investing in the stock market? For comparison’s sake, if we look at the period of 1990 through 2018 (the earliest and most recently available dates for farmland financial performance), $100 invested in the S&P 500 would be worth $1,325. That same $100 invested in U.S. farmland would be worth $1,997— roughly 50% more.
These return figures are historical, and past performance is certainly no guarantee of future results. However, given the large swings in stock prices witnessed over the past few decades, it is no wonder the asset class of farmland has continued to gather more interest from investment funds, pension funds and family offices. Bill Gates has been investing billions of dollars in recent years. Even in a down market for land prices, these landowners should still find their losses somewhat limited thanks to the annual income provided by farming.
To be clear, we do not view farmland as a get-rich-quick scheme. There are plenty of arguments to be made that the next decade of land investment may not look like the last. Though we are a company focused exclusively on farmland investing, we don’t believe in portfolio concentration at all.
We view farmland investing as the opposite. For investors who don’t have any exposure to farmland (most do not), owning some farmland may make financial sense. The argument for a diversified portfolio makes even more sense when taking into account the price of farmland has historically had little or no correlation. Other major asset classes don’t influence its price. Farmland has traditionally served as a protection against inflation similar to gold. However, unlike gold, the supply of farmland is permanently limited, and it produces an annual income.
We think most people would be surprised to learn just how well farmland has performed against the stock market. Expect to hear more buzz about farmland investing as interest in this asset class continues to grow.
Editor’s note: Carter Malloy is founder and CEO of Fayetteville brokerage AcreTrader. The opinions expressed are those of the author.