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Land has proven itself to be a solid investment for thousands of years. You can build structures on it, grow crops or harvest the natural resources already on the land.
A lot of investors looking to invest in land come to an impasse when deciding whether to invest in farmland or timberland. While both have generated solid returns, there are some key similarities and differences between them.
Returns from timberland as well as farmland have both outpaced the stock market during certain time periods. All with significantly less volatility.
During times of uncertainty, these boring investments become a highly desired asset. With equity markets at all time highs, cryptocurrencies rallying and real estate prices surging, investors are looking elsewhere for returns.
Similarities Between Farmland And Timberland
- Both provide you with the ability to make money by holding onto the land (asset appreciation) as well as deriving money from the land
- Returns for both investments over the last few decades have been high, oftentimes outpacing the broad stock market
- Since both are considered low risk investments, the volatility or up and down price movement is low
- Both of these are illiquid investments, meaning it is not easy to sell them and convert them into cash
- Both are a long term 5+ year investment in most cases
- Correlation between timberland/farmland prices and the stock market are low, making this a great way to hedge or diversify into alternative investments
- Both investments have outpaced inflation
- Growth in populations worldwide mean that we will need more food to feed everyone and more lumber to construct homes
Differences Between Farmland And Timberland
- Timberland is susceptible to the “boom and bust” cycles of the housing market, meaning the prices of lumber could have a huge impact on returns
- If you rent out farmland, you can expect to earn rent on a monthly, quarterly or annual basis
- With timberland, you are basically sitting on a commodity and you have to decide when to cut the trees and sell the lumber, making the income less consistent
- There are new composite building materials that are competing with lumber, however there is no man-made solution thus far to supplement the demand for fruits, vegetables etc.
- However, dairy-free trends are a risk factor to consider before investing in a dairy farm, as we do have man-made cow-free alternatives for milk and dairy products
- There is a wider array of farmland investments available today versus timberland investments
- Timberland is at a significantly higher risk for fires versus farmland, especially during a drought
If you are looking to further diversify into alternatives, owning both could be a solid option.
However, if you have to pick just one, farmland seems to be the better choice for the following reasons:
- Rental income from farmers is far more predictable and consistent than trying to sell your lumber at the perfect moment
- There have been massive fluctuations in lumber costs in 2021, which would jockey your profit margin around
- It's far easier to gain exposure to farmland today compared to timberland due to the wide array of farmland investment platforms available
- Composite building materials are threatening the future demand for lumber, especially if prices keep climbing for wood
Based on historical returns, you probably won't go wrong with either. However, diversification is the best way to ensure this is the case.