You’ve probably heard the age old adage that says, “the higher the risk, the higher the reward.”
Well, this may not always be true. In fact, with farmland, investors have historically earned double-digit returns – and with much lower volatility than that of stocks. Even more impressive, returns to farmland have proven to be resilient during periods of inflation and market-wide recessions, too.
And yet, most investors do not have farmland in their portfolio.
This is largely due to the difficulty of sourcing and operating a farmland investment. On one hand, there’s typically a large capital investment cost and, on the other hand, there’s a significant time investment involved. Not to mention, operating a farm requires significant agricultural experience.
However, thanks to modern investment technology, an investment in farmland is easier than ever. Investment managers, such as FarmTogether, enable accredited investors to access top-notch farmland opportunities without ever having to step foot on a farm!
So, what makes it such a historically attractive investment?
In this article, we highlight a few of the top reasons that may make farmland the ultimate safe-haven investment.
This article is sponsored by FarmTogether, an affiliate partner of Farmland Riches.
What Makes Farmland A Safe Investment?
For many individuals, the primary objectives of investing are safety, income, and growth. Farmland can accomplish all three of these requirements.
So, why is this the case? Well, there are a few reasons for this. Farmland investments have historically offered investors the following:
- Inflation Hedge
- Store Of Value
- Tax Benefits
- Steady Returns
- Passive Income
Let’s take a closer look at each of these to better understand why farmland can be such a reliable investment.
1. Inflation Hedge
A key driver of market uncertainty is high inflation, as is the case today. While inflation cooled to 7.7% in October, the inflation rate is not projected to return to the Fed’s 2% target until the end of 2025.
While many assets lose value in inflationary environments, farmland has historically performed quite well.
This is because farmland returns are highly correlated with the Consumer Price Index.
Farmland produces many of the raw ingredients used to make common household products, which make up a good portion of the CPI. When inflation rises, so too should the price of food and other agriculture staples.
Thus, higher prices tend to result in higher farm incomes, which, in turn, can lead to higher land values.
Additionally, farmland is becoming more scarce over the years. In fact, the USDA found that the United States lost 1.3 million acres of farmland in 2021 alone.
And yet, the demand for food is rising.
In summary, inflation typically increases the value of crops. Farmland and farming is becoming increasingly scarce. And global food demand is at an all time high. These factors have created a recipe for strong and consistent long-term returns.
2. Store Of Value
Farmland is a physical asset with inherent value.
When investing in farmland, you own something real and tangible. In comparison, ownership of shares in a company is represented by a document demonstrating ownership. The document itself has no value.
The value of the shares can increase and decrease as the underlying company makes decisions. But the value can also rise and fall based on consumer perception and emotion, supply chain impacts, inflation, and much more.
Not only does farmland have inherent value, but it is also a finite asset – we can’t create more farmland. While farmland certainly has its risks, it tends to retain some value given its underlying physical characteristics.
Investing in farmland can also provide you with diversification.
A classic portfolio with a 60/40 allocation of stocks and bonds has greater risk of decline in periods of uncertainty than a portfolio with investments in multiple asset classes might.
Thus, experts recommend spreading your money across multiple asset classes to help reduce overall risk. If the market were to crash, this doesn’t mean real estate, or more specifically, farmland’s value would also fall.
In fact, over the last several decades, farmland returns have been historically uncorrelated to conventional assets, such as stocks, bonds, and real estate, as well as broader market indices. More importantly, while other assets reduce in value (stocks, bonds, etc.), farmland returns actually tend to increase.
4. Tax Benefits
Farmland investments have numerous potential tax benefits that investors can take advantage of. Costs including repairs, maintenance, utilities, mortgage interest, and more can be deducted to offset the income earned.
Additionally, investors may be able to defer taxes owed by investing gains from the sale of a farm into another like-kind investment, or vice versa.
Another benefit is the potential for reduced property taxes. Many states in the US incentive farmland investment by offering reduced property taxes.
5. Steady Returns
Farmland investments have a track record of attractive returns. In fact, over the past few decades, farmland has seen an average yearly return of roughly 11%. This is right in line with the S&P 500 which has grown roughly 10.7% annually since 1957.
But these returns are even more impressive on a risk-adjusted basis. During the same time frame, the S&P 500’s standard deviation was over 16%. Meanwhile, farmland’s standard deviation was just 6.75%.
This stability is largely driven by a host of factors, including real assets’ intrinsic demand and long-term structural trends driving values upward.
The world’s population reached 8 billion this year in 2022. By the end of the century, experts estimate the population will reach 10.4 billion. Growing population means an increased food demand. In fact, a Harvard Business Review stated that food demand is expected to increase between 59% and 98% by 2050.
This can be welcome news for investors interested in farmland. With consistently growing demand for food, farmland returns should continue growing over time.
6. Passive Income
In addition to appreciation over time, farmland investments can also provide investors with passive income.
While farm work can be tough, investors can enjoy monthly or yearly income through rental payments and sales from operations on the farm. Both operations of the farm and through rental payments crop production.
How To Get Started With Farmland
Of course, you can buy a farm outright to start investing in farmland. However, this is certainly easier said than done.
FarmTogether offers accredited investors a more hands off approach.
FarmTogether aims to provide accredited investors with unparalleled access to top-tier U.S. farmland opportunities through a variety of channels, including crowdfunded farmland offerings, 1031 exchange, sole ownership bespoke offerings, and their Sustainable Farmland Fund.
The company was founded in 2017 and has since funded over 40 deals with more than $160 million in assets under management.
They handle it all, from sourcing and risk management to operations and distributions, to remove the barriers to entry that would otherwise turn investors away if they tried to do it all themselves.
To date, FarmTogether has analyzed over 9,200 farmland investment opportunities. Of that 9,200, less than 1% of deals have been brought to investors. Their due diligence process is one of the reasons why they are a top farmland investing platform available.
Once a deal is fully vetted, they then offer investors the chance to participate through crowdfunding, bespoke portfolios, or a fund. The platform is reserved for accredited investors and requires a low minimum of just $15,000.
If you are interested in getting started or learning more, be sure to check out their product offering!
Be sure to read our full review of FarmTogether here.
Why Farmland Is A Safe Investment: Final Thoughts
With the potential to help enhance diversification, preserve capital, hedge against inflation and generate long-term returns, farmland can be a great option for investors.
There’s a reason why the ultra wealthy like Bill Gates are scooping up farmland at every opportunity!
Learn more about farmland investing with our comprehensive beginner’s guide.