The Untapped Investment Opportunity in Farmland Real Estate

Farmland has long been an overlooked and undervalued asset class in the world of real estate investment. However, farmland is becoming increasingly attractive as investors look to reallocate their portfolios amidst changing markets. This, combined with a growing shift in capital ownership structures in the farm industry, has created a new opportunity for investors looking to invest in a historically stable, uncorrelated asset. But before investors make the leap into farmland real estate, it’s important to understand the farmland investment landscape.

In this article, we provide an overview of the current state of this untapped market and explore the potential benefits of investing in farmland. 

The U.S. agricultural landscape

The United States is an irreplaceable cornerstone of global agriculture. The US is the third-largest producer of food in the world, after India and China, and is by far the largest exporter. Overall, the US agriculture industry generates over $1 trillion in economic activity annually and exports more than $177 billion of food, feed, and fiber overseas. 

Undoubtedly, America’s farms play a vital role in the overall value of the agriculture sector. In 2021, the US’ 890 million acres of farmland, spread across just over two million farms, generated more than $435 billion in total cash farm value. Primarily driven by a growing demand for food for these products, both in the US and overseas, the average value of cropland in the United States increased by 14% last year, reaching a record high of $5,050 per acre. 

Yet, despite the high output and sophistication of American farms, farmland ownership is fragmented. Investors own less than two percent of US farmland, which sits at an estimated $2.9 trillion in total value. The remaining ninety eight percent is family-owned, most of which has been passed down through multiple generations.

This represents a compelling opportunity for accredited and institutional investors who are increasingly attracted to farmland for similar reasons that have attracted them to real estate over the last few decades, which we’ll cover below. 

Benefits of farmland investing 

Farmland is a subset of real estate that has historically provided investors with many of the same perks as more common real estate options, like stable returns, steady land appreciation, and diversification benefits. 

What differentiates farmland from real estate, however, is its risk-return profile. Since 1992, the NCREIF Farmland Index has delivered average annual returns of 10.71 percent. This performance was not only better than real estate, which posted returns of 8.39 percent, but also stocks at 9.58 percent and REITs at 9.43 percent. 

Farmland’s returns since 1992 are even more impressive from a risk perspective. Farmland’s annual volatility was just 6.64 percent over the last three decades, compared to the S&P 500’s volatility of 17.80 percent and real estate’s volatility of 7.62 percent. This performance can be attributed, in large part, to strong land values. As the demand for food continues to rise with a rapidly growing population, the value of productive farmland should likely continue to increase, making it a valuable asset to hold.

Additionally, farmland investments can provide steady and predictable returns, with rental income from leasing the land to farmers or profits from selling crops. Unlike typical real estate investments, farmland investors can also earn income from the farm operations themselves. This means farmland can be an excellent hedge against inflation, as the value of agricultural products tends to rise during times of inflation. Last year, farmland had a near -1 correlation with the CPI. 

Types of farmland investments

Farmland investing can take on various forms but is generally grouped into two categories. First, there are “row” crops, which include crops like soy, corn, wheat, and cotton, that regrow every year. In general, these have lower annual cash flow yields but less volatility. 

“Row crops are basically an investment in the land because you can switch out the crop from year to year,” said Artem Milinchuk, founder of FarmTogether, a farmland investment manager. “The farmers take almost all of the risk because they pre-pay rent before the growing season in the spring,” he continued. 

Higher on the risk/reward scale are permanent crops. These include tree fruits, like citrus or apples, as well as tree nuts, like almonds, pistachios, and hazelnuts. These crops typically have longer investment horizons and are usually worth more than commodities, like corn or wheat, but they also carry a higher risk. If market trends shift, farmers can not easily swap the block for a more desirable product. 

Additionally, many permanent crop offerings are development deals. Because these crops must mature before they reach economic profitability, these investments have a “J-curve” return profile and may take many years to start to show a profit. 

Much like other investments, farmland doesn’t come without risks, but farm investment has proven to be very resilient in the long run. “We advise investors to think about farms as a ten-year investment,” Milinchuk said, “there might be good or bad years, harvest-wise, but in the long run, we know there is only so much farmland and only more demand for food.” 

How to get started

Previously, farmland investing was limited to people with experience in agriculture, but that is changing thanks to new investment avenues. Farmland investment manager, FarmTogether, provides investors with unparalleled access to institutional-quality farmland opportunities through various investment products. These products include bespoke offerings, which start at $3 million, their Sustainable Farmland Fund, which requires a single allocation of at least $100,000, and their crowdfunding platform for a lower minimum of $15,000.

With continued uncertainty on the horizon, now might be the perfect time to think about getting into one of the essential properties in the world, no matter the economic conditions: farmland.