Investors looking for safe havens amid a volatile market are finding a solution in America’s heartland by buying stakes in farms and ranches.
Farmland has seen an influx in investor capital in recent years, thanks in part to a growing number of public and private platforms offering a variety of structures. “It’s certainly not a ‘get rich quick scheme’, but what has been intriguing about farmland over time is its consistency of compounding income and appreciation,” says Carter Malloy, founder and CEO of AcreTrader, an online farmland investment platform that connects investors and farmers looking for capital.
Farmland continues to perform comparatively well relative to other asset classes. The NCREIF Farmland Index, which currently accounts for $15.9 billion in farmland, has generated average annual returns of 8.9% over the last four quarters, and an annual average of 12.8% over the past two decades.
“When you think about long-term returns, being inflation resistant and providing diversification, farmland does extremely well,” says Artem Milinchuk, founder & head of strategy, FarmTogether, a private investment manager that has $170 million in farm assets under management and serves individual investors and institutions. "It's uncorrelated to most other asset classes. Why not present it to everyone for their portfolios like stocks, bonds and treasuries?"
Farmland has the potential to produce both appreciation and income, either from rent or revenue from an active agriculture or livestock operation. Farmland has historically beat inflation by a few percentage points, but it has seen outsized value increases in recent years. According to National Land Realty, farmland prices in the U.S. have increased for 31 consecutive months through April. “While these increases have continued, they do so at a much less dramatic rate than we saw in 2022 and 2021,” says Jeramy Stephens, a broker-partner and accredited land consultant in the Little Rock, Ark. office of National Land Realty. The general consensus forecast is that market values on farmland will plateau in 2023, adds Stephens.
Investors are attracted to the yields, as well as the ability to use farmland as an asset to diversify and stabilize investment portfolios. In fact, it is the steady value gains and low volatility that attracted high-profile investors such as Bill Gates. His investment advisors have reportedly acquired some 270,000 acres across the U.S. on Gates’ behalf over the past decade.
Industry data also shows that farmland produces similar returns to commercial real estate over the past two decades with less volatility. Farmland doesn’t have big swings in values with huge upside years or huge downside years. “Farmland is typically a less liquid, long-term investment, but we see quite a bit of interest for that rationale of portfolio stabilization,” says Malloy.
Different investment strategies
Investors are finding a variety of entry points into farmland investments, including publicly listed REITs, such as Gladstone Land Corp. (LAND) and Farmland Partners Inc. (FPI), as private equity funds and offerings.
RAD Diversified is a non-traded REIT that dipped a toe into the farmland arena in 2020 with the purchase of its first farm for $8 million. “More people ask us about farmland than any other investment that we do,” says Dutch Mendenhall, founder and CEO of RAD Diversified. The company has Reg A and Reg D offerings that are open to accredited and non-accredited investors with minimum investments of $1,000. Investors like farmland for a variety of reasons, including the fact that there is a scarcity component, he says. “What I like about land is that it is not just land that you buy and sit on, which is the case with a lot of land investments. It's an income tool,” he adds.
RAD Diversified is both a buyer and hands-on operator of the farms it acquires. RAD Diversified has realized value by making improvements to farms that allow it to produce a more optimum yield, as well as investing in things like technology that can improve efficiency. “I think self-managing the farms has been a really valuable tool for us,” he says. RAD Diversified now owns farms in Idaho, Arkansas and Tennessee and expects to launch a non-traded REIT specializing in farmland later this summer.
AcreTrader takes a different approach, buying farms and creating unique LLC or LLPs that are open to accredited investors on its online platform. Those investments are generally passive structures with income generated from rent to farm producers that are working the land. Investors also have the potential for appreciation at the exit, with a typical hold period of five to 10 years. Currently, AcreTrader has farmland investments in 18 U.S. states. The company is in the process of developing fund products that provide easier access to a portfolio of farmland for RIAs and their clients.
A key part of the AcreTrader model is to partner with farmers so they are incentivized to bring acquisition opportunities to the company, while also growing their business. “We view ourselves as an equity financing model, and we’re able to be creative in our approach with farmers through our broker-dealer license,” says Malloy.
Its sponsor model allows the farmer to have a carried interest and invest alongside AcreTrader. From the farmer’s perspective, there are a lot of fixed costs and economies of scale to be gained by growing their business. However, if a piece of land next door comes up for sale at $3 million, most farmers don’t have that kind of capital to make that purchase, says Malloy. If the farmer brings that purchase opportunity to AcreTrader, they look at incentives to create more of a partnership, such as sharing in rents or profits, which helps to align interests, he adds.
Another player on that side is FarmTogether. The firm, which was founded in 2017, offers four investment options. It has crowdfunded offerings open to accredited investors with $15,000 minimums and target net IRRs of 6% to 13%, a sustainable farmland fund with minimums $100,000 for Class A shares and $5 million for Class I shares and target net IRRs of 8% to 10%, sole ownership bespoke programs with a $3 million minimum and an option for 1031 exchange investors.
Farm Together focuses on farms worth $10 million or less, which Milinchuk estimates account for 70% of the farmland in the United States. Milinchuk says technology developments in the last few years have enabled the company to build a scalable business on an asset class in ways that were cost-prohibitive previously, including in sourcing assets to buy. It also uses proprietary software to factor for climate, weather, soil quality and hazard risks like natural disasters that allow it underwrite deals.
"If you think of any other asset class--treasury notes, stocks, single-family housing--there are so many tools and metrics to see if you paid a good price or a bad price," he says. "In farmland, 50% of the deals do not make it into the public domain. And the 50% that are for sale in the public domain are not on one website. There are 3,000 brokers and dozens of websites."
To solve for that, the company's tech tools combs through available deals and builds internal comp tables. And for off-market deals, the firm's team works to build relationships with brokers, farmers and other industry players as well as trying to be a creative buyer through its multiple investment vehicles.
Expanding buyer pool
Despite the rise of investor interest, the primary buyers for farmland are still other farmers. According to Malloy, institutionalization of investment in farmland has grown probably ten-fold over the past decade. However, as a percentage of the overall industry, institutional ownership of farmland is still a small fraction of the overall market at about 2%. “It is a meaningful trend that we’re seeing, but we are still very early in that trend,” he says.
Although the farming industry remains firmly in the hands of farmers, data shows that farmland and the number of individual farms are both shrinking, reflecting industry consolidation and land that is being sold for development. According to the USDA, the number of farms in the U.S. dropped by 9,350 in 2022 to an estimated 2,002,700, while total land in farms decreased by 1.9 million acres to 893,400,000 acres.
The reality is that farmers are opting to sell for a variety of reasons. In some cases, there are multi-generational family farms where the farmer is nearing retirement age and doesn’t have anyone in the next generation to pass it on to operate. The pool of potential buyers can be diverse depending on the location and the farm, and include other farmers, private equity funds, REITs, developers and individuals who want to buy farms and ranches as homes and second homes. For example, Gladstone is one of the bigger buyers. Last year, the REIT acquired over 3,000 acres of farmland across six different states for a total purchase price of $65 million.
Pricing on farmland varies widely depending on the location and type of farming use from $1,500 an acre to upwards of $50,000. Due to the high cost of entry, buying farmland can have a large barrier to entry. And while there are platforms on the market that make investing in farmland easier, investors do need to analyze those vehicles carefully, advises Stephens. Depending on the structure, those investments may not offer true ownership of the land, but rather ownership in a holding company that owns the land.
In addition, while farmland is still seen as a hedge investment on inflation, with a plateau on farmland values likely ahead in 2023, investors should approach new investments with caution, adds Stephens. One of the big downside risks to farmland is that farmland value can fluctuate with market conditions and commodity prices. “Commodity futures indexes are something to really pay attention to when it comes to farmland,” he says.
Other inputs also factor into farmland value, such as supply chain challenges and higher costs for things like natural gas, diesel and fertilizer. “These increases affect farmland prices by increasing the overall cost of operation, resulting in higher land and commodity prices to compensate for these costs,” he says. Although those factors result in some protection of the overall market value, inflation pressure and interest rate hikes have created an environment that is a bit more volatile than what farmland has historically seen, he adds.
WMRE Editorial Director David Bodamer contributed to this article.