Dirt. Soil. Farmland. U.S. farmland.
Can it be an investable asset if you’re not a farmer and don’t want to be?
The answer you might be surprised to know, is a resounding, “Yes,” and farmland (specifically, U.S. farmland), is especially suitable to the investor looking for alternative investments to a traditional stock/bond/mutual fund portfolio.
Indeed, U.S. farmland is, for many investors, a fantastic addition to an overall, healthy, alternative investment allocation.
O.K., that’s great; yet another non-traditional, investment vehicle to get familiar with enough to give my hard-earned dollars to it, in the hopes it will not just hold them for safe keeping but deploy my funds in a way that will produce a positive return on the investment.
If U.S. farmland can really do that for me, how do I invest in it if I don’t want to become a farmer? For this article, I will assume that farming is not the attention of this reader.
However, before we go down the path of theory execution, let’s explore the theory in more detail and answer a foundational question for the investor. That question is, “Why is U.S. farmland a good alternative investment?”
The answer is, “For several reasons.” Here are some of them:
5 Reasons U.S. Farmland is an Attractive Alternative Investment:
- Inflation hedge – U.S. farmland is a scarce and stable asset that steadily increases in value over time and thus provides a good hedge against inflation. It is not volatile like the stock market, yet still provides equity appreciation. Thus, you can sleep peacefully with an investment in farmland and rest assured you are almost certain not to lose principal. Unlike residential real estate, farmland in the U.S. has never had a down year of negative appreciation and its average annual yield, nationally is 3%, though farmland value is very local and varies considerably between states and even parts of states.
- Diversification – Farmland is an asset that is not correlated to the traditional stock and bond markets and thus provides diversification to an overall portfolio and especially its alternative investment allocation.
As I will discuss below, today, an investor can easily further diversify the farmland allocation itself within the overall alternative investment allocation. Below you will learn how to own multiple types of farmland for your portfolio; cropland, pastureland, etc., all without ever getting your hands dirty.
3. High Global Food Demand – According to National Geographic Magazine, by the year 2050, the increasing global population will require roughly double the amount of crops that were grown on the planet in 2022.
Only 7% of earth’s land is suitable for food production, and most of that land is already in production. Accordingly, an increase in food demand is an increase in land demand. It’s just simple logic.
As an economist would perhaps describe it, the elasticity of the demand is far greater than the elasticity of the supply. In other words, the demand changes (increases), are greater than the supply’s changes (ability to meet the demand).
This, naturally, is a recipe for increased prices; no getting around it.
- Farmland is a Good Source of Passive Income
According to the USDA, there are roughly 911 million acres of farmland in the United States and over half of the cropland acres are leased out to operator/farmers.
In fact, the largest amount of farmland in the world is owned not by a farmer or cooperative of farmers, an institution or non-governmental organization.
You may be surprised to learn that the largest holding of U.S. farmland, is owned by Bill Gates. The reason is that Gates is a smart investor, and he is good friends with Warren Buffet, one of the most successful investors of all time. Both Buffet and Gates recognize the value of farmland as an investment, but they are far from being farmers.
- Farmland is Exempt from Certain Taxes
There are numerous tax breaks and exemptions available to farmland investors.
- Agricultural property is usually assessed at a much lower rate of its market value, than the rate on residential property, and the rate varies by state.
- Mortgage interest on agricultural land is deductible from your federal taxes. If your land is home to a working farm, your farming income is exempt from the federal government’s wealth tax.
- State tax exemptions (again, obviously varying by state).
O.K. Now that we have shown 5 good reasons why U. S. farmland can be a wise addition to the alternative investment allocation of many investors’ portfolio, let’s explore the 3 different types of farmland, and how the average investor can invest in them today.
The 3 types of farmland:
- Arable – Arable farms are farms that produce crops (such as wheat, vegetables or even timber), and are therefore sometimes referred to as “cropland.” This cropland can be irrigated or non-irrigated with irrigated obviously being more valuable.
- Pastoral – A pastoral farm is a farm that raises animals for meat, wool or dairy
- Mixed – Obviously a combination of the above.
Again, assuming the reader does not want to be literally getting his/her hands dirty managing an investment in a farm, just how can we otherwise take advantage of the numerous benefits to be had in a farmland investment?
The answer is to have someone else do it for you.
The advantage of having someone else farm your land is that first, you do not have to be the farmer obviously.
More specifically, you do not have to be any one particular type of farmer.
That is, you do not have to be a dairy farmer, a crop farmer, or any other specific type of farmer.
You can just be the investor. In fact, you can invest in all of the above with a passive investment in agriculture, and farmland specifically..
Your investment can take on many forms. As a principal, you can own the asset (the farmland) and manage/operate/farm it yourself, or you can own the asset and have someone else manage/operate/farm it for you, or you can own the asset and lease it to an operator/farmer, or you can make it even easier, and own the investment, but not own the asset!
Sounds like the best of both worlds, and it certainly can be, but how does one do that?
By letting an “institutional” investor (usually a real estate, private equity fund), purchase and manage the asset (the entire farm of a portion of it) with a farmer to operate it on behalf of the farmer, the investor, and the fund.
The fund essentially securitizes the asset creates a salable investment from it so that multiple investors can purchase fractional shares, membership interests, or units in the overall portfolio of properties owned by the private equity fund.
Wow. Sounds perfect, but how do I find a private equity fund that will do that?
That part is simple, and although there are numerous funds out there that do essentially the same thing, one that immediately comes to mind and is specifically for investors seeking farmland is acretrader.
In its simplest form, acretrader first raises investment capital from accredited individual and institutional investors via a Private Placement Offering (PPO).
It then takes an ownership interest in a farm parcel, then fractionalizes that ownership interest in a legally specific way that is complainant with all federal and state securities laws governing the creation and sale of investment securities.
Once all the Offering documentation is complete, the Offering is ready to be marketed to investors seeking a stable asset to add to their allocation of alternative investments in their portfolio.
A qualified investor subscribes to the Offering by simply signing the Offering documents and making a transfer of funds to the equity fund’s escrow account.
That simple process then creates for you a real ownership interest in a farm that acretrader has already completed due-diligence on and vetted as a solid investment for the fund and its investors.
You can explore all the benefits of investing with acretrader by clicking here.
In conclusion, if you are an investor serious about diversifying the alternative investment allocation of your portfolio with a stable asset that can easily produce passive income you can enjoy for as long as you hold it, then look no further than farmland and acretrader as your perfect vehicle to own it.