At the surface level, farmland immediately sounds like a sensible, low risk but not especially exciting investment. Farmland investment should be like commercial property investment without the economic cycles and danger of vacant periods or over supply dragging down rents.
Demand is relatively secure. Even if Western consumers reduce their supermarket spend, they don’t tend to reduce the number of calories being consumed. At least not for financial reasons. And cheaper own brand alternatives to premium foods still contain flour, oil and the other mainstream agricultural commodities most farmland is used to grow.
Farmland should also be a stable investment. Operators sign lease agreements for usually 5 or 10 years at a time and take on the risk attached to fluctuating agricultural commodity prices. That means farmland owners don’t especially benefit when, as recently, agricultural commodity prices leap. But they also shouldn’t notice much difference when they drop. The rent stays the same.
But like any investment, the devil is likely to be in the detail when it comes to investing in farmland. What form will the investment take? Not many of us have the financial muscle to invest in farmland directly, with large, stable operators requiring the kind of large tracts required for efficient, profitable commercial operation.
So what options are open to investors who would like to diversify their portfolio with exposure to farmland? And is it really the kind of low risk, low return investment it sounds like it should be?
Farmland as an asset class
In the USA, farmers directly own about 61% of the 911 acres of active farmland across the huge country. Only about 10% is owned by non-operating investors but that is growing as farmland becomes more popular as a low volatility asset class that can realise better returns than other assets with a comparable risk and volatility profile.
In the UK, around 23% of farmland is owned by non-operating investors.
Source: Cazenove Capital
With global food production needs only going to increase, productive farmland is also a finite and inelastic asset class whose fundamentals suggest strong capital growth potential as well as reliable rental income.
UK farmland has, for example, seen capital growth of up to over 50% over the past decade. Over the same period, the average cost of farmland in the USA has grown by 48%.
Source: Strutt & Parker
Analysing the historical returns offered by U.S. farmland, The Motley Fool concludes:
“Over the last 50 years, the value of American farmland has risen by about 6.1% per year, with only five down years during that period. Add in the cash rent yields, and the return to investors has been even more impressive. Since 1991, farmland has produced a positive return every year, generating an average annual return of 11.5%, according to the USDA. To put that return into perspective, it has outperformed all other asset classes except the Dow Jones REIT Index during that time frame.”
The key strengths of farmland as an asset class are:
Low volatility – historically, returns generated by farmland have shown lower volatility than most other asset classes, including the 10-year U.S. Treasury Bond, S&P 500, gold, and Dow Jones REIT Index.
Low correlation – farmland returns generally show low correlation to the stock market and it’s far from unusual for the asset class to show positive returns over years the major indices like the S&P 500, Nasdaq and FTSE 100 are down.
Inflationary hedge – the long-term capital and rental value of farmland is tied to the price of agricultural commodities like cereal crops which rise with inflation. While there may be a lag if long term rental contracts are in place for farmland, its value and rental yield will always adjust for inflation when lease agreements are renewed.
The risks of investing in farmland
Every investment carries risk and farmland is no exception, though it is considered low risk as an asset class. The risks an investor in farmland is exposed to vary significantly, depending on if it is a non-operational investment or involves some degree of exposure to farming operations.
In the former case, the major risk is the tenant operator is unable to meet the agreed rent. That could happen if crop yield is significantly lower than expected due to adverse weather conditions in the short term or climate change in the longer term. Another risk is potential degradation of the land’s long term yield potential if not managed correctly because the tenant is taking a short term view.
If a farmland investment is of a non-operational nature, rental yields would only be expected to show volatility in extreme conditions that threatened the financial security of the operator. If returns are tied to operating the farmland, they will be more volatile and ebb and flow with commodity markets as well as being heavily influenced by the quality and efficiency of the farming operations.
Farmland investment options
High net worth investors and family offices might consider investing in farmland directly or through non-listed investment vehicles but for most investors, a minimum practical buy-in threshold running into the millions will be prohibitive. There are, however, a number of listed trusts and funds that offer full or part exposure to farmland as an asset class.
Their numbers are also increasing. US agricultural investment vehicle Sustainable Farmland Trust PLC earlier this month announced plans to float on the London Stock Exchange. The trust said its goal its to provide an “attractive level of risk-adjusted income”, as well as potential capital growth via investment in mostly US diversified farmland and other agriculture-focused assets.
It targets a net asset value annual return of 7% to 9%, and a dividend yield of at least 4.5%, both on the basis of the initial issue price. The trust’s US-based investment manager, International Farming Investment Management LLC and its affiliates have over $2.2 billion in assets under management and commented:
“As a market leader in farmland investing, IFC has owned or managed approximately 420,000 farmland and ranchland acres across over 18 US states, two Australian states and Chile, cultivating more than 80 crop types”.
“Not only are returns from farmland assets historically negatively correlated to equity market movements, but they also exhibit a historical positive correlation with inflation and are anticipated to be accretive in a high inflationary environment.”
There are also two major US-listed REITs focused on farmland that offer direct and liquid exposure to the sector for retail investors as well as dollar exposure, which is currently attractive with pound sterling in freefall. They are:
- Farmland Partners
- Gladstone Land Corporation
Farmland Partners owns 160,790 acres of farmland across 17 U.S. states worth . Risk Is diversified by the land holding being leased to over 100 tenants growing at least 26 different crop types. It has assets of $1.166 billion at cost and true asset value is significantly higher due to appreciation since purchase. However, the REIT currently trades at a significant discount to its net asset value with a market capitalisation of just $717 million, despite gains of almost 50% over the past couple of years.
Gladstone owns farmland in Arizona, California, Colorado, Delaware, Florida, Georgia, Maryland, Michigan, Nebraska, New Jersey, North Carolina, Oregon, South Carolina, Texas and Washington. As of August, 9, 2022, the REIT said its portfolio had a total fair value of over $1.5 billion. Its market cap is just $638 million.
