In recent years, you may have heard the word “farmland” come up in relation to investment strategies. Instead of steady returns and reliable growth, you might instead conjure up images of rolling pastures, long dirt roads between fields of crops and vibrant Midwest sunsets over swaths of emerald green. It’s a beautiful scene. But is it worth your time and money as an investment strategy?
You may be surprised to learn that investing in farmland may indeed offer the kind of stability and consistency certain investors are seeking.
As an investable asset class, farmland in the U.S. is highly fragmented, typically with family-owned farms passed down from generation to generation. These farms make up a large portion of the farmland market, and with these valuable assets controlled by multi-generational families, it’s exceptionally difficult for investors to access the growth potential of farmland investing. As such, it can take years for investors to aggregate at scale – a primary goal of many sophisticated investors.
However, just because investing in farmland is an uphill climb doesn’t mean it’s not worth the effort. An investment in farmland is an effective strategy for hedging against inflation and volatile markets. In fact, farmland is known as a low-volatility asset. With many assets, as consumer prices rise with inflation, the value of the asset decreases. But with farmland, the value tends to rise right along with consumer prices. This trait adds considerable potential to a portfolio.
As a non-correlated asset, farmland investors aren’t handcuffed to the uncertainty of the stock market. The farmland can continue to produce income and rise in value no matter the stability or instability of the current market. Since farmland has only become scarcer over the years, a trend that’s likely to continue, capital appreciation likely will continue to grow, as well.
For high-net-worth individuals, investing in farmland can be a smart way to diversify portfolios within a sector known to have strong risk-adjusted returns. Nevertheless, any potential investor should conduct their own diligence first and seek out and consult with the most knowledgeable and experienced advisors who can get the best results from their investment. Diversification within farmland portfolios with various crop types and geographies is key to provide long-term income and total return potential.
Opportunities and Considerations
In November 2022, humanity reached a new milestone with a global population of 8 billion people. The following year, in the first and second quarters of 2023, gross domestic product (GDP) increased by 2.2% and 2.1% respectively. This means the global consumption of staple, permanent and specialty crops is rapidly expanding. The U.S. is a net exporter of agricultural goods, and demand for U.S. products continues to increase as we witness record exports.
From our perspective, current farm ownership presents a timely opportunity for investors. Right now, we’re seeing a demographic shift in farmland ownership due to aging farm families, with 45% of all U.S. farmland owned by those older than 65 and those who are 65 and older also owning the largest amount of land. A turnover in ownership for a huge percentage of America’s farmland appears to be imminent, potentially giving investors the biggest opportunity in generations to invest in this land.
As we look off into the horizon, consumer trends only make farmland more appealing for investors. Consumers control the supply chain, and Americans are more dedicated to adopting healthier eating habits now than ever before.
As an investor in American farmland, providing people around the world with safe, quality food is certainly something you can feel good about. But farmland investing strategies can go a step further by focusing on ESG and sustainability practices to mitigate climate change and protect the environment, along with our food supply. Modern investors are sharp. They want to see a balance between total returns and sustainable management practices. T
Technology and Innovation
In many industries, climate impact is effectively reduced by leaning into technology and innovation, and farming is no different. New technologies are being introduced to the market to improve crop yields, manage water quality, mitigate pressure from pests and disease, and of course, reduce climate impact. We’ve only just begun to see how much innovation can improve farming and help the planet. Technology providers are actively seeking institutional farmland managers to test their new innovations, which they can test at scale for accurate, efficient feedback.
One of the most effective advances for farming is GPS technology, which helps growers better manage inputs like seeds, pesticides and fertilizers used to optimize crop yield. For instance, farmers use GPS to determine where to apply more or less seed, depending on the location in the field, the fertility level and the type of soil. This strategy effectively increases crop yields and, by extension, profit margins.
While GPS is a relatively widespread technology, institutional farmland managers use newer technologies, like sophisticated data platforms, to better manage farmland investments. Cloud analysis software, such as FarmAdvisor, is an invaluable tool that empowers investment managers to make data-driven decisions based on real-time analytics and reporting. The most successful investors know when to outsource knowledge, and this is certainly true when it comes to this type of cloud computing technology.
Like any other niche field, agricultural technology is unique to this particular market, and a reliable investment partner must have access to the newest and most innovative technologies. This requires a specific set of skills and knowledge to yield the best results. Data platforms, for example, are used to make quantitative based decisions – both in managing assets and proving transparency to consumers.
Potential investors should take time and choose the right partner for their investment goals. An institutional farmland manager with the right skills, knowledge, access and network can facilitate the stability and consistency of farmland investing.
Brian Uken is a Partner, Investment Solutions; and Bob Zimardo is a Partner, Investor Relations & Operations; both at International Farming.