Founder and Head of Strategy of FarmTogether
In March 1981, Clifford Ganschow and Frederick Gale attempted to launch Growth Farm Investors, a farmland fund for institutional investors with a projected value of $10 million. Unfortunately, the fund failed to garner enough interest, and the launch was unsuccessful.
Today, just 40 years later, an estimated $26 billion of United States farmland is owned or managed by institutions.
Let’s dive into the benefits of this asset class, the rise of investor demand for farmland and the new, innovative ways individuals can now get in the game.
Benefits Of Farmland For Investors
There are several reasons why investors might consider an allocation in farmland over other asset classes, such as real estate or gold:
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Average farmland returns have historically exceeded inflation by 6.1% per year over the last 50 years. While inflation hit a 40-year high at 9.1% in June 2022, average farmland values have risen around 14% in the first half of this year.
Historically Strong Returns
Since 1991, farmland investments have yielded an average annual return of 10.74%, based on data from my company. For comparison, this data calculation shows higher returns than equities or real estate during the same time frame. Moreover, in the last three decades, farmland has yielded a positive annual return each year.
Historically, farmland has experienced less volatility than both traditional and alternative asset classes, as the demand for food tends to remain stable—no matter the economic environment. While the stock market decreased 19.8% in Q1 2020, average farmland values decreased by just 0.1%. This loss at the start of the Covid recession was farmland’s second negative quarter in 30 years.
Over the past 40 years, farmland returns have been historically uncorrelated to popular assets, like stocks, bonds or real estate, as well as broad economic cycles and market conditions. Notably, farmland values did not tend to drop during past recessions or other events when many stock indexes lost value.
Growth Of Institutional Demand
In the late 1970s, the Continental Illinois National Bank of Chicago proposed to invest $50 million worth of tax-exempt pension funds into farmland. While the plans never materialized, the proposal set the stage for institutional-driven farmland offerings for decades to come.
In 1981, John Hancock Mutual Life Insurance Company launched the Agricultural Capital and Real Estate (ACRE) fund for pension plan investors. AgriVest, founded as part of the Connecticut Mutual Life Insurance Company, was formed two years later. By the 1990s, some of the country’s largest pension funds were investing in farmland.
In 2004, the NCREIF Farmland Index included 299 properties worth almost $900 million; 10 years later, the index consisted of 539 properties worth over $5.5 billion. In 2011, the Iowa Public Employees’ Retirement System announced a $100 million investment in AgriVest, one of the most significant single allocations at the time.
In 2015, public pension funds, endowment funds, foundations and private pension funds represented more than 10% of all institutional ownership of farmland. By October 2020, institutional investment in farmland had grown to $11.7 billion—almost five times higher than all institutional investment in farmland just a decade before. As of Spring 2022, an estimated $8.7 billion of institutional investor farmland funds had been raised in the past five years.
New Accessibility For Individual Investors
Despite growth among institutions, farmland’s upfront costs and operating requirements still present a barrier for most individual investors. In 2021, the average cost per acre for farmland in the United States was $4,420, while the average size farm is 444 acres. It’s also estimated that the average cost for farming equipment averages approximately $450 per acre.
In addition to these high costs, investors did not have the tools to make proper investment decisions until recently; the NCREIF Farmland Index, widely considered the first farmland investment benchmark, wasn’t created until 1991. Meanwhile, the first publicly traded farmland fund—with only two farms in its portfolio—wasn’t created until 2011.
Thankfully, recent innovations within the farmland space are driving new opportunities for the first time. There are now two publicly-traded farmland REITs and a handful of agriculture REITS available to retail investors. Additionally, there are now online farmland investment managers that handle the sourcing, due diligence and operations of institutional-quality farmland offerings—all for low minimums of $15,000.
As with any investment, there are a handful of considerations that investors might want to weigh prior to making an allocation in farmland.
Its important for an investor to consider how farmland returns are generated, which crops to invest in and how these factors might impact their portfolio. For example, permanent crops, such as tree nuts or citrus, have historically higher returns but may take years before reaching full maturity. Row crops, like corn and soybeans, on the other hand, can provide investors with more immediate income, but their returns tend to be lower.
Farmland investors must also be mindful of different operating structures. Lease agreements, most commonly used with row crops, can shield landlords from commodity price fluctuations, but tend to limit profit due to fixed rental income. Alternatively, direct management contracts, most commonly used with permanent crops, can offer more exposure to commodity markets, as annual income is directly tied to crop sales.
While historical average farmland returns have remained notably stable since 1991, it’s also important to highlight that investors are not likely to see market-beating returns with this asset class. On the other hand, farmland returns are not as likely to experience huge losses as seen with the stock market. Thus, in many portfolios, farmland can serve as a good diversifier and a hedge against volatility when markets go awry.
The Future Of Farmland
Land values increased 12.4% from August 2021 to 2022, topping $5,000 per cropland acre for the first time in history. Meanwhile, cash rent for cropland has increased 5% from 2021 to 2022. For these reasons, coupled with a growing number of investment opportunities now available, I remain optimistic about farmland’s performance for the remainder of 2022 and into 2023.
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