How to Invest in Farmland

Investing in farmland has emerged as a smart and stable option for investors seeking long-term returns, diversification, and a hedge against inflation. Unlike stocks and bonds, farmland offers tangible assets that generate income through crops, leasing, and appreciation of land value. As the global population grows and food demand increases, farmland investments have become increasingly attractive. In this post, we’ll explore the steps, strategies, and options for how to invest in farmland, whether you’re a novice investor or a seasoned one looking to diversify.

Why Invest in Farmland?

1. Stable Returns and Income Generation

Farmland has a history of providing stable and attractive returns. The combination of income generated from leasing the land to farmers and the long-term appreciation of land value offers investors steady returns over time. Farmland investments typically provide annual cash flow through rent or revenue from the crops harvested.

2. Hedge Against Inflation

As inflation rises, the price of commodities such as crops tends to increase, which can lead to higher land values and higher rent. This makes farmland a strong hedge against inflation, as it is an asset class that tends to appreciate in times of rising prices.

3. Diversification

Farmland investments are not correlated with traditional stock market investments, which means they can act as a diversifier in an investment portfolio. When stocks are volatile, farmland often remains steady, providing balance and stability to an investor’s portfolio.

4. Growing Global Demand for Food

With the global population projected to reach nearly 10 billion by 2050, the demand for food and agricultural products is expected to soar. Investing in farmland allows you to capitalize on the increasing need for arable land and food production.

How to Invest in Farmland

1. Direct Farmland Ownership

One of the most straightforward ways on how to invest in farmland is to purchase the land directly. This option provides the most control over the asset, allowing you to lease it out to farmers, manage crop production, or even sell it for profit if the land appreciates.

Benefits:

• Full Control: You own the land outright, which allows for greater control over how it is used or managed.
• Income and Appreciation: You earn both from leasing the land and from the appreciation of the land value over time.

Drawbacks:

• High Initial Cost: Purchasing farmland requires significant upfront capital. Depending on the location, an acre of farmland can cost anywhere from a few thousand dollars to tens of thousands.
• Management Responsibility: Owning farmland means you are responsible for its management, including leasing, maintenance, and potential legal or environmental issues.

2. Farmland Crowdfunding Platforms

If you’re looking to invest in farmland but don’t have the capital or interest in managing the land, farmland crowdfunding platforms offer a more accessible option. These platforms pool money from multiple investors to purchase farmland, allowing individuals to invest with smaller amounts of capital.

Popular crowdfunding platforms include:

• AcreTrader: Allows investors to buy shares of farmland properties with investments starting as low as $10,000. AcreTrader handles the management and leasing of the farmland on behalf of investors.
• FarmTogether: Another platform where investors can buy fractional ownership of farmland starting at around $10,000. FarmTogether also manages the operations, allowing for passive investment.

Benefits:

• Lower Entry Barrier: You can start investing with smaller amounts of money, typically starting from $10,000 or less.
• Passive Investment: The platform manages the farmland, making it easier for you to invest without worrying about day-to-day operations.

Drawbacks:

• Less Control: You don’t have direct control over the land or its management.
• Liquidity Issues: Farmland investments through crowdfunding platforms are often illiquid, meaning you may need to hold the investment for several years before seeing returns or selling.

3. Farmland REITs (Real Estate Investment Trusts)

Farmland REITs offer an even more accessible way on how to invest in farmland. A farmland REIT is a publicly traded company that owns and operates farmland. Investors can purchase shares in the REIT, gaining exposure to farmland as an asset class without owning land directly.

Popular Farmland REITs:

• Gladstone Land Corporation (LAND): This REIT invests in farmland and leases it to farmers who grow a variety of crops.
• Farmland Partners Inc. (FPI): Specializes in buying and leasing farmland to tenants, primarily in the U.S.

Benefits:

• Liquidity: Farmland REITs are traded on the stock market, so you can buy and sell shares as needed, providing greater liquidity than direct ownership or crowdfunding.
• Low Entry Cost: You can invest in farmland with just a few hundred dollars, making it accessible to a wide range of investors.

Drawbacks:

• Market Volatility: REITs are tied to the stock market, so they may experience more volatility than direct farmland ownership or crowdfunding platforms.
• No Direct Ownership: You don’t own the farmland outright, so you don’t have the same level of control over how it’s managed.

4. Farmland Mutual Funds and ETFs

Farmland mutual funds and exchange-traded funds (ETFs) invest in agricultural businesses, farming technologies, and sometimes even farmland directly. These funds provide exposure to the agricultural sector without the complexities of managing land or dealing with tenants. This can be one of the best strategy on how to invest in farmland for the beginner investor.

Popular Funds:

• VanEck Agribusiness ETF (MOO): An ETF that invests in agribusinesses, providing exposure to companies that deal with agriculture and food production.
• iShares MSCI Global Agriculture Producers ETF (VEGI): This fund tracks companies that are involved in farming and agricultural production.

Benefits:

• Diversification: Investing in funds or ETFs gives you exposure to a broad range of companies involved in the agricultural sector.
• Easy Access: You can invest with relatively small amounts of money and trade like stocks.

Drawbacks:

• Indirect Exposure: You’re investing in agricultural businesses rather than owning farmland, so returns are based on the performance of these companies.
• Market Risk: Like REITs, mutual funds and ETFs are subject to stock market volatility.

5. Leasing Farmland

Leasing farmland is another option, especially for those who want to generate income from land without owning it. With this model, you lease the land to a farmer or agricultural business for a fixed period and earn rent based on the lease terms.

Benefits:

• Steady Cash Flow: Leasing farmland can provide consistent rental income.
• Lower Upfront Costs: Leasing farmland is less expensive than purchasing it outright, as you don’t need to buy the land.

Drawbacks:

• Limited Upside: You won’t benefit from the appreciation of land value if you’re leasing rather than owning.
• Risk of Default: If the farmer or lessee defaults on the lease, it could impact your income.

Factors to Consider Before Learning How to Invest in Farmland

1. Location

The location of the farmland is crucial for its profitability. Different regions specialize in different crops, and factors like climate, soil quality, and proximity to markets will influence the land’s productivity. Research areas with high agricultural output and consistent crop performance when learning how to invest in farmland.

2. Water Access

Water availability is essential for farming. Make sure the land has access to a reliable water source, either through rainfall, irrigation, or nearby rivers. Areas with drought issues or insufficient water infrastructure may present long-term challenges.

3. Crop Types

Understanding the crops grown on the farmland is important. High-demand crops like corn, soybeans, and wheat typically offer stable returns. However, specialty crops like almonds, avocados, or vineyards may offer higher profits but come with more risks.

4. Farmland Management

Farmland requires management, whether you do it yourself or hire a professional. If you’re investing through direct ownership, you’ll need to oversee operations or hire someone who can. If you prefer a more passive role, consider REITs, mutual funds, or crowdfunding platforms that manage the land on your behalf.

Conclusion

How to invest in farmland can be a profitable and stable addition to your investment portfolio, offering income from leasing, appreciation in land value, and a hedge against inflation. Whether you choose direct ownership, crowdfunding platforms, REITs, or mutual funds, the key is to evaluate the risks, understand the management involved, and carefully consider location and crop type. Farmland investments offer unique benefits, and with the right approach, they can provide long-term financial rewards.