The Rise of Farmland Investments as an Alternative Option
Land that is specifically used to grow crops or raise livestock and that has been allocated in zoning laws for agricultural purposes is called Farmland. Active investing in farmland involves running a farm, while growing crops or raising livestock can be operationally intensive, there are passive ways to take exposure to this asset class. A typical passive direct farmland investor leases the land to a local farmer, a cooperative, or an agricultural corporation. Since lease payments are made on a calendar basis, the cash rents provide a steady stream of payments that are not tied to a particular growing season. The other key form of return is appreciation in land value.
Types of Farmlands can be grouped into three major categories:
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Row cropland produces periodic crops such as corn, soybeans, cotton, wheat, and rice. In general, these have lower annual cash flow yields but less volatility.
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Permanent cropland involves perennial crops like fruits and nuts, which have distinct pre-productive and mature stages. Certain crops, such as almonds, reach peak productivity and then decline, making orchard age crucial while estimating their worth.
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Livestock investments include land leased to local operators for grazing or direct livestock ownership and operation. In extreme cases, poor herd management can lead to a temporary reduction in land value due to animal damage.
The advantages of investing in Farmland include – Low Volatility– which historically provided stability to investors during market downturns. Diversification – uncorrelated to conventional financial assets such as stocks, bonds, etc. Great Inflation hedge– With rising inflation, farmland value tends to increase in value as the price of farmland is closely linked to commodity prices.
Direct investment in farmland has its own challenges such as High capital requirements, Illiquidity, and requirement of specialized knowledge.
The closest that an investor can get to investing in farmland without directly owning land or working the fields is by purchasing Farmland REITs. These REITs buy land, lease it to receive rent, and pass on that rent in the form of dividends to investors after expenses. Here are a few popular options:
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Farmland Partners Inc. (FPI)
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Gladstone Land Corporation (LAND)
Crowdsourcing platforms are a solid alternative to REITs if you are considering passive exposure to Farmland. Besides deal-by-deal ONLY investment options and high investment minimums, lack of a long track record makes crowdfunding platforms a less attractive option than publicly traded REITs for a few investors. Below are a few platforms worth considering –
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Acre Trader makes it easy to invest in farmland. Each property is subdivided into smaller, more affordable segments. By subdividing and pooling investors’ capital, investors can make farmland investments with just $10,000.