Founder and Chief Strategy Officer farm together
In March 1981, Clifford Janshaw and Frederick Gill attempted to launch Growth Farm Investors, a farmland fund for institutional investors with a projected value of $10 million. Unfortunately, the box failed to attract sufficient attention, and the launch was unsuccessful.
Today, just 40 years later, an estimated $26 billion of farmland in the United States is owned or managed by corporations.
Let’s delve into the benefits of this asset class, the increasing investor demand for agricultural land and the new and innovative ways people can take advantage of it now in the game.
Benefits of agricultural land for investors
There are many reasons why investors should consider allocating farmland over other asset classes, such as real estate or gold:
Hedge against inflation
Agricultural yields have historically averaged 6.1% per year over the past 50 years. While inflation hit a 40-year high of 9.1% in June 2022, average farmland values rose about 14% in the first half of this year.
Historically strong returns
Since 1991, farmland investments have generated an average annual return of 10.74%, based on data from my company. For comparison, this data calculation shows higher returns than stocks or real estate over the same time frame. Moreover, in the past three decades, agricultural land has generated a positive annual return every year.
Historically, farmland has experienced less volatility than both traditional and alternative asset classes, with food demand tending to be stable—regardless of the economic environment. While the stock market fell 19.8% in the first quarter of 2020, average farmland values fell just 0.1%. That loss at the start of the Covid recession was the second negative quarter for farmland in 30 years.
For the past 40 years, farmland yields have historically been unrelated to common assets, such as stocks, bonds, or real estate, as well as broad economic cycles and market conditions. Notably, farmland values have not tended to fall during previous recessions or other events when many stock indices lost their value.
Institutional demand growth
In the late 1970s, Continental Illinois National Bank in Chicago proposed investing $50 million in tax-exempt pension funds into farmland. While the plans were never realized, the proposal paved the way for institutional-driven farmland offerings for decades to come.
In 1981, John Hancock Mutual Life Insurance launched the Agricultural Capital and Real Estate (ACRE) Fund for investors in retirement plans. AgriVest was founded as part of the Connecticut Mutual Life Insurance Company, two years later. By the 1990s, some of the country's largest pension funds were investing in farmland.
In 2004, the NCREIF Agricultural Land Index included 299 properties valued at approximately $900 million; After 10 years, the index consisted of 539 properties worth more than $5.5 billion. In 2011, the Iowa Public Employees Retirement System announced a $100 million investment in AgriVest, one of the most significant individual allotments at the time.
In 2015, public pension funds, endowment funds, foundations, and private pension funds accounted for more than 10% of all institutional ownership of agricultural land. By October 2020, institutional investment in farmland had grown to $11.7 billion — nearly five times all institutional investment in farmland just a decade earlier. As of spring 2022, an estimated $8.7 billion in farmland institutional investor money has been raised in the past five years.
New access for individual investors
Despite the growth among institutions, initial costs of farmland and operating requirements remain a barrier for most retail investors. In 2021, the average cost of an acre of farmland in the United States was $4,420, while the average farm size was 444 acres. It is also estimated that the average cost of farm equipment is about $450 per acre.
In addition to these high costs, investors did not have the tools to make appropriate investment decisions until recently; The NCREIF Agricultural Land Index, widely regarded as the first benchmark for agricultural land investment, was not established until 1991. Meanwhile, the first publicly traded farmland fund—with only two farms in its portfolio—was not established until 2011. .
Fortunately, recent innovations in the agricultural land area are driving new opportunities for the first time. There are now two types of publicly traded agricultural REITs and a handful of agricultural REITs available to retail investors. In addition, there are now online farmland investment managers that handle the sourcing, due diligence and operations of institutional quality farmland offerings - all for a minimum $15,000 USD.
Agricultural Land Considerations
As with any investment, there are a few considerations that investors may want to consider before allocating farmland.
It is important for an investor to think about how he generates returns for the agricultural land and the crops he invests in and how these factors might affect his portfolio. For example, perennial crops, such as walnuts or citrus fruits, have historically higher yields but may take years before they reach full maturity. On the other hand, row crops, such as corn and soybeans, can provide investors with immediate income, but their returns tend to be lower.
Agricultural land investors should be aware of the different operating structures. Lease agreements, more commonly used with row crops, can protect landlords from commodity price fluctuations, but tend to limit profit due to fixed rental income. Alternatively, direct management contracts, more commonly used with perennial crops, can provide more exposure to commodity markets, where annual income is directly related to crop sales.
While average farmland returns have remained remarkably stable since 1991, it is also important to highlight that investors are unlikely to see market-hit returns with this asset class. On the other hand, farmland yields are not likely to suffer huge losses as is evident in the stock market. Thus, in many portfolios, farmland can serve as a good diversification agent and a hedge against volatility when markets go awry.
The future of farmland
Land value increased 12.4% from August 2021 to 2022, exceeding $5,000 per agricultural acre for the first time in history. Meanwhile, the cash rent of agricultural land increased by 5% from 2021 to 2022. For these reasons, along with the increasing number of investment opportunities now available, I remain optimistic about the performance of agricultural land for the remainder of 2022 through 2023.
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