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When people think about investing, the stock market is where their mind typically goes first.
This is for good reason. According to a recent Gallup poll, approximately 55% of Americans own stock. Farmland on the other hand is a much less popular investment among the general public.
As reported by the US Census Bureau, only 1.5 million Americans own farmland. As a percentage, that's less than 0.50% of the entire US population.
Historically, this makes sense. It has been much more difficult to purchase farmland than it has been to purchase a share of Procter and Gamble from a stockbroker.
However, today the landscape is changing, and investing in farmland is becoming a much more realistic prospect for everyday investors looking to diversify their portfolios.
When we look at farmland as an asset class, it's no wonder why there is so much interest from investors looking to get involved. With returns comparable to the stock market, and significantly less volatility, an investment in farmland could make sense for many.
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Historical Returns: Farmland vs. Stocks
Human civilizations have been farming for thousands of years and farmers have needed large swaths of land in order to grow crops and raise livestock. However, the idea of land ownership is much more recent. In ancient societies, land belonged to the gods and farmers used that land to serve the gods.
However, today this is no longer the case and land is owned by people and used as a means to generate and protect wealth. Of the approximately 911 million acres of farmland in the US, about 70% is owned by farmers. The other 30% is owned by individuals or corporations for investment purposes.
As an asset class, farmland has returned a healthy 12.1% over the last 20 years. A study from AcreTrader found that a $10,000 investment in farmland made in 1990 would now be worth over $199,700.
Over the same time period, the S&P 500, a collection of stocks of the 500 largest companies in the US, returned 9.2%. With these returns, the same $10,000 investment would be worth only about $117,500 today.
When comparing returns, it's also important to consider the volatility of the investment. Farmland clearly comes out ahead here. In the last 20 years, there have been a number of corrections in the stock market including the dot-com bubble and Great Recession.
Farmland on the other hand, has not had a year with negative returns since before 1990. As a result, an investment in farmland is about 1/3 as volatile as an investment in the S&P 500.
Judging from the numbers alone, it seems like farmland is coming out ahead. With greater returns and lower volatility, it's easy to see why an investment in farmland would be attractive. However, there are a number of other factors that need to be considered before making your decision.
How Returns Are Generated
In the stock market, returns come from one of two places: dividends and capital appreciation. Dividends are periodic payments made from companies to their shareholders. Capital appreciation takes place when a stock is sold for a higher price than it was bought for.
Stock market investors can choose to invest in companies that pay higher dividends or in companies where greater appreciation is expected. These are typically referred to income stocks and growth stocks respectively.
On average, S&P 500 companies have returned 3% – 5% in dividends and a 9.2% total return.
Farmland returns are fairly similar, they can come in the form of rental income or capital appreciation. Rental income is paid by farmers who are using the land to grow crops and livestock. Appreciation occurs when the land is later sold than more than what it was bought for.
Investors in farmland can choose whether to invest primarily for income or capital appreciation. Income investors will seek out farms that already have a farmer that is paying rent and will buy the parcel primarily for cashflow.
Growth investors may seek out land that requires improvements or does not have a tenant. After making the required improvements or finding a tenant, they hope to sell the land for more than they paid for it.
Historically, the average income yield on farmland has been 3% – 9% while the total return has been 12.1%.
Risks: Farmland vs. Stocks
The types of risks you'll be experiencing as a farmland investor vary significantly from the risks of stock market investors.
Three of the most significant risks posed by farmland investing that investors are unlikely to see in the stock market are weather risk, crop risk, and liquidity risk.
When owning a stock, you don't have to worry much about natural events impacting your investment. Barring a serious earthquake at a company's headquarters or production facilities, there's not much to worry about here. However, with an investment in farmland, one severe drought can significantly reduce the farmer's ability to pay rent or the quality of the soil.
In addition to the weather, investors also have to worry about things like insects or disease wiping out crops. While some farmers pay rent before planting season, which means investors get paid regardless of crop yield, this is not always the case.
Investors also need to consider the liquidity of their investment in farmland. Unlike stocks that are sold on open exchanges five days a week, the market for farmland is much less liquid. With the rise of crowdfunding farmland platforms like AcreTrader offering a secondary market, you won't necessarily be locked into your investment.
However, when investing in farmland it's important to take a long-term time horizon and only invest cash that you won't need in the immediate future.
Stock Market Risks
It's also important to note some of the risks stock market investors face that farmland investors do not. These include company risk, market risk, and political risk, to name a few.
Whenever investors put money into a single stock, they are taking on a significant amount of risk. If that company experiences hardships or goes out of favor, investors are liable to see the share price react dramatically. This is not something farmland investors experience.
Additionally, there exist risks that threaten the stock market as a whole. These include widespread recessions, political events, terrorist attacks, and a number of other events that can cause the stock market as a whole to drop.
Farmland investors have seen their investments hold steady throughout these events. In fact, farmland has also served as an effective hedge against inflation over time as well.
How To Purchase: Stocks vs. Farmland
These asset classes are both available to the everyday investor. However, the way investors purchase stock and the way they purchase farmland vary significantly.
Most investors are pretty familiar with the ways they can purchase a stock. In the days of old, this was done by calling up a stockbroker, but today there are a number of online brokers and apps that allow you to buy stocks commission-free.
The markets are only open from 9:30 am – 4:00 pm EST on weekdays, so you'll need to make your purchases within this time frame.
When it comes to purchasing farmland, investors have a couple options to choose from. The two most popular methods for buying farmland are either buying the land directly, or going through a farmland crowdfunding platform.
Purchasing farmland directly is a pretty straightforward process. You can work with a real estate agent specializing in farmland, or choose to seek out farmland that is for sale yourself. Once you identify the land, you'll work with the seller to determine the terms of the transaction. Then, depending on your cash on hand, you'll likely need to take out a loan from the bank to finance the property.
Now you own the property, but you've still got to get a farmer to rent it from you and manage the property. This is a relatively drawn-out process, and from start to finish you can expect it to take a few months. you'll also have the ongoing commitment of working with the farmer and managing the land.
Your other option which is typically more attractive to investors is to go through a farmland crowdfunding platform. There are a number of these popping up lately, including FarmTogether and AcreTrader, which allow investors to vastly simplify the process.
These platforms do all of the due diligence for you and typically list fewer than 1% of the deals that come across their plate. Additionally, they allow investors to get start with as little as a few thousand dollars. This is because the deals are set up as a number of investors pooling their money together to purchase a large parcel of land.
Through these platforms, investors can diversify their portfolios by investing into more deals. With a lower barrier-to-entry and no management requirements, it's much easier to invest.
Social Impact: Farmland vs. Stocks
For many investors, the social impact of their investments is an important factor to consider.
Social Impact Of Farmland
Depending on the circumstances of the deal, investing in farmland can have a significant impact. When purchasing farmland directly from the farmers using it, you can have a large impact on the family and the community as a whole. That is because farmers are an integral part of our society.
Farmers produce the food we eat everyday and have a tremendous impact on our lives. By becoming a farmland investor, you have the ability to participate in this process that nourishes the world.
In addition, there are many farms that are currently pursuing much more sustainable practices. Investing in these farms sends a message to the industry about where you would like to see food production go in the coming years.
By moving your capital into farmland investments, you can directly have a say in the future of agriculture in America. At the same time, you can rest easy knowing that your investment is bringing significant impact to an entire community.
Social Impact Of Stocks
While there are some companies that claim to have a focus on social impact, purchasing their stock is unlikely to further that mission. That's because the seller of that stock was likely another investor and not the company.
Additionally, most for-profit companies in the current business environment are still largely profit-driven. While the idea that corporations should consider all stakeholders is on the rise, there is still a long ways to go on this front.
However, owning stock in a company typically grants you the right to vote in shareholder meetings. This could potentially allow you to make your voice heard on social issues that are important to you.
In the end, it's possible to have a social impact through stock market investing, but it's not likely to be significant.
Final Verdict: Farmland vs. Stocks
When considering whether an investment in farmland or the stock market makes more sense for your personal situation, there are a number of important factors to weigh.
First are the returns. As an investor, we want to see a positive return from our capital. Farmland clearly comes out ahead in this respect as it has consistently outperformed the stock market.
Then, investors need to weigh the risk of the asset classes. With almost a third of the volatility of the S&P 500, farmland also comes out ahead on this front.
When it comes to the risk profiles of the two asset classes, there is not a clear winner. Depending on your investment philosophies, each will present a different set of risks. It's important that you are aware of the risks you are taking on and consciously decide how to mitigate them.
Historically, it has been much easier to purchase stocks than farmland. However, with the increasing number of crowdfunding platforms, it now can take minutes to make your first investment. That being said, it will likely still be more difficult to sell a farmland investment early if you need the cash.
The bottom line is that if you are creating a diversified portfolio, both farmland and stocks have a place. Due to their negative correlation, holding both of these assets will reduce overall risk in your portfolio.