Why You Should Invest In Farmland – Forbes

At Terra Ag Ventures, our mission is to provide investors access to high quality farmland investment opportunities in the Southwest while employing sustainable farming practices with respect to water and soil. We’ve been investing in farmland for over 20 years and understand the benefits of having this asset class in a modern and diversified portfolio.

However, although farmland has generated superior returns historically for us and other investors and is an attractive investment for most portfolios, it is also misunderstood and very difficult to access. Over 86% of all farmland is owned by families (much like the single-family home market) with the rest held by large institutional interests including endowments, pension funds, insurance companies, family offices and private equity firms. 

The historical returns of farmland investing have been uncorrelated to conventional assets and securities such as stocks, bonds, real estate, timber, and even short-term agricultural commodity prices. Accordingly, the inclusion of farmland in a portfolio increases diversification while providing an attractive hedge against inflation. Additionally, farmland has delivered a higher average annual return than most asset classes in the last 29 years (1992-2020). To summarize in more detail, farmland has:

(1) Historically Attractive Returns (1992 – 2020 / 11.01%)

(2) Low Volatility of Returns (1992 – 2020 / 6.9%)

(3) Uncorrelated with Other Asset Classes (1992 to 2020 / -0.05 to 0.45)

(4) Long-Term Tailwinds (high demand with decreasing supply and recession / inflation resistant

Farmland crops can be divided into two sub-categories, annual row crops and permanent crops. Annual row crops, such alfalfa, corn, wheat, peppers, squash, lettuce, and others, are planted and harvested annually, or more frequently. Permanent crops, such as oranges, almonds, and grapes, have plant structures such as trees or vines that produce crops annually without being replanted.

Row Cropland

Row cropland investments produce annual crops such as corn, soybeans, cotton, wheat, and rice. In general, these have lower annual cash flow yields but less volatility. They typically have shorter harvest periods and involve lower upfront capital expenditure. The crop decisions are made annually providing additional flexibility for farmers to react to relatively current market conditions.

Permanent Cropland

Permanent cropland investments, our focus here at Terra Ag, include perennial crops such as fruit and nut crops, which have both pre-productive and mature periods. Pre-productive or “greenfield” investments must mature before they reach economic profitability. Some permanent crops, like almonds, peak in productivity and then decline so orchard age is an important factor in estimating productivity and value. Others, such as pistachios and pecans, take longer to reach economic profitability but can produce an economically viable crop for over 50 or 100 years. These crop types have longer investment horizons and offer opportunities for higher profitability and higher yields but also carry higher risk.

Farmland Values

Farmland values began rising in 1988 and, except for single-year declines in 2009 and 2016, have continued rising. Additionally, since 2000, the NCREIF Farmland Income Index, which tracks the value of U.S. farmland, has more than tripled. A similar positive trend in farm income growth and appreciation of land values occurred in other major crop-producing regions, such as South America, Oceania, and Europe.

Regionally, farmland values vary widely because of differences in general economic conditions, local farm economic conditions, government policy and local geographic conditions that affect returns to farming. Cropland values are highest in the Pacific region with California ($12,900/acre) and Arizona ($7,650/acre) having the highest value cropland as of 2020.

Food Demand

The world currently faces a global supply-demand imbalance with regards to food production. As the global population continues to rise, with expectations of reaching 9.7 billion by 2050, approximately 70% more food will be required than is consumed today. Additionally, it is estimated that only 7% of the Earth’s land is suitable for cultivation with most of the world’s productive arable land already in crop production. With increasing food production needs and decreasing land suitable for cultivation, this will create a supply-demand imbalance.

Alongside the rise in global population and growing food production needs, increases in income per capita is driving higher daily caloric intake. 2.3 billion people currently consume 2,000 to 2,500 kilocalories per day; however, this number is expected to drop to 683 million by 2030 as consumers transition to diets of 2,500+ kilocalories per day. This shift in consumption will be most prevalent in developing nations such as India and Africa, which remain 30% below current U.S. average consumption levels.

In addition to the increase in population and caloric intake, consumer preferences are evolving to include a greater emphasis on nutritious foods due to a better understanding of health benefits and higher income per capita. Within the U.S. and the developing world, this growing awareness of the importance of what people eat and its influence on a healthier lifestyle is driving demand for fresh, wholesome foods. In the U.S., more than half of Americans report trying to consume more protein, fiber, whole grains and vitamins and minerals in their diets.

Driven by rising demand for food, decreasing land supply, low correlation with other assets and historically strong performance, it is thus not a surprise that more investors are looking to access farmland as an investment opportunity. As with other types of real estate, farmland investors also benefit from tax savings through depreciation. At Terra Ag, we’re excited to see this investment opportunity become more mainstream with investors looking for ways to diversify and earn solid returns.

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