Today I’m going to talk about an AMAZING diversification and wealth protection method. Farmland investing.
Wait! Before you scroll away, I’m not actually suggesting you drop everything and go buy a farm! Llamas are cute and all, but that seems like a lot of specialized knowledge for city folk like me. There are really great managed options out there, and we’ll walk through what’s good and what’s bad together.
Farmland is uncorrelated to pretty much the rest of the economy, which can make it great for diversification, it’s considered by many as super protected from inflation. Plus global demographics are moving in favor of farmland investing! Also it’s real estate – which will always be the secret sauce to any investor’s portfolio.
So today we’ll talk about farmland investing and its past performance compared to the rest of the market, why current trends make it such a sound option moving forward, as well as the best options for investing.
Farmland investing: Historical Performance
Farmland investing vs. S&P 500
I’m a long term investor. Not a flipper. So I look back as deep as I can, which is surprisingly hard for direct farmland investing. It’s not a field that has great public data.
But there is one index. The NCREIF Farmland Property Index, which has shown some pretty stellar growth over the last 3 decades.
AcreTrader has a lot of fineprint for this plot so I’ll just copy it here.
Past performance does not guarantee future results and there is no guarantee this trend will continue. Note: AcreTrader internal analysis covers periods 12/31/1990 – 12/31/2021. All returns are estimates and assume reinvestment of dividends. Index information is provided for illustrative purposes only and is not meant to represent the results of an actual investment. Returns do not include any management fees, transaction costs or expenses. Volatility is measured as the standard deviation using the monthly total returns of each index or asset class. The historical performance of each index cited is provided to illustrate historical market trends. Risk/reward profile for each asset class varies significantly. This should not be construed as a recommendation of any specific security. You cannot invest directly in an index. Data source: Calculated by AcreTrader using information from Bloomberg, Federal Reserve Bank of St. Louis, NCREIF and NYU Stern School of Business. “Farmland” = NCREIF Farmland Index. “Timberland” = NCREIF Timber Index. “Commercial Real Estate” = NCREIF Property Index. “S&P” = Standard & Poor 500 Index. “REITs” = Dow Jones REIT Index. “CD” = Bankrate Historical 1-Year CD Interest Rates. “AAA” = ICE BofA AAA US Corporate Index. “U.S. Govt. Bonds” = U.S. Treasury 10-Year Bond.”
Now, I think anyone can find a plot to prove a point but there is one really interesting thing about this data.
It never goes down.
Like investing magic!
Here’s a closer look at farmland investing in the past 20 years. The total returns are always positive!
Farmland REITs vs direct farm ownership
So now let’s look at another metric. Remember how I told you that you don’t have to drop everything and buy a farm? One of your options is to buy a farmland REIT. A REIT is basically a stock you buy on the stock market that’s purely tied in real estate.
Read more about REIT investing, its performance against other real estate options, and the best alternatives.
I won’t sugar coat this. The performance of public farmland REITs has been horrendous compared to the S&P 500 stock index. That’s a bad sign. The people running these REITs likely know what they are doing so that has some implications but I’m not disturbed (you’ll see why).
There are two REITs traded on the public markets for farmland and both have trailed the market since inception in 2013.
But the last 10 years have been totally bonkers as an investor. No matter what happens in the world the stock market keeps going up.
- Greece goes bankrupt threatens to send the world into default? market rises.
- Brexit threatens to destroy EU? Market rises.
- Threats of a US impeachment? Market rises.
- Insane pandemic? Market rises.
- Natural disasters? Market rises.
So I don’t consider it a huge negative for a safe investment to not beat that.
But that’s just the last decade, so let’s go back further.
There is some data all the way back to 1950 where you can see the true potential of farmland via the performance of Iowa farmland and what it has experienced since 1950 in comparison to the S&P 500.
I don’t know what is special about Iowa but damn it’s hot! Their main commodities are corn and soy, and I guess all the vegetarians are supporting this powerful growth.
But that was the past. Now let’s look at the future.
5 reasons to bet on farmland investing
I’m not someone who falls for the “this should be great” sales pitch. I like looking at history and assessing my risk and rewards from there. And history shows that farmland investing can be as safe as S&P 500 or the stock market in general.
But now the fun part. Does it make sense that farmland investing could do well in the future?
In a word, Yes. Let’s look at 5 trends that show why:
1. Demographic trends mean high demand for farms
Certain demographics have played a major role in farmland performance and continue to do so. Growing population has been a fact of life for centuries and is unlikely to change, placing a high demand on farmland to feed the growing population .
With a growing population, there’s a higher demand for food. Go figure. On top of that, there’s an increase in health-conscious consumers calling for fresh and healthy food not only for their own households, but for schools, fast-food restaurants and other industries. Our need for farms is not going anywhere.
Even if we account for better farming technologies increasing yield output, there has been a new demand for rural areas. During the pandemic, many professionals whose jobs permit them to work from anywhere have shunned densely packed cities for the expansive suburban sprawl, a trend likely to continue post-COVID.
Combine that with decreasing amounts of farmland over the past 50 years and you have way more demand than supply. That’s a trend I can invest in.
2. The politics of supporting farmers
I’m not terribly into politics or into the idea of investing in something that is affected by politics. But there is something attractive about investing in a field that ALL politicians want to support.
Federal subsidies have been a big component of farm incomes. U.S. farm products compete at a global scale, so it can be understood that foreign trade negotiations and international tariffs can greatly impact the industry. One of the best performing farmland is in Iowa (above chart). Also, nearly 50% of New Hampshire’s economy is agriculture-based.
Why am I mentioning this? Ever heard of the Iowa Primary and the New Hampshire Primary? The first two primaries in all presidential candidate nominations! These states decide who the candidate will be for a party to run for president. Do you think that lobby can be ignored?
Food security is another concern. Not having to import agriculture and be protected from food price volatility is a political necessity. So farmers are often subsidized during bad weather or poor harvest. Hurrah!
Look at the tariff between the US and China over the last few years. China targeted US farmers with its retaliatory tariffs. As a result, 92% of the tariffs levied on China were used to bail out farmers.
Currently, there are at least eight different main farm subsidy programs the government can use to aid the industry and 2020 was a record year for farm subsidies. Whether it’s a trade war, a pandemic, or bad weather, do you think politicians can ignore farms and farmers? Knowing that, you don’t want to ignore farmland as an investment asset.
3. Protection against Inflation
Whenever I speak to people outside of North America, they’re genuinely concerned with inflation. What’s the point of an investment strategy if inflation surpasses interest growth and all your life savings can barely cover your necessities?
But here’s the interesting thing. The price of food is literally a metric of inflation. If the cost of living goes up, so does the price of your product. Hurrah! Something that is inherently inflation-adjusted.
Farmland is a real asset. It’s not just an idea whose stock can frivolously go up and down depending on public opinion. It’s something you can physically see and touch. Over the next few years no one knows what will happen with inflation, recessions, and the economy in general. But I do know that farmland can easily be hedged!
4. No correlation to stocks
The best case for farmland as an investment is that it is a true diversifier. It is uncorrelated to the stock market. One of the only things that hurt agribusiness is bad weather! Not pandemics, or a slowing economy, or tariffs. Demand for food is always going to be there. Farming is all about the supply-side.
That is a complete opposite to governments and central banks using demand-side economics in trying to control the economy, and the stock market, with interest rates.
Since I don’t have great data to track farmland (you have to spend a ton of money to join the NCREIF Farmland Property Index people), we can look at a company that actually sells to farmers and is correlated enough to the performance of a farm for it to be considered a proxy for the industry – Deere & Company.
In 2020, we’ve dealt with tariffs, a global slowdown, and a pandemic. We know stocks still managed to do well. But Deere did even better than most!
Deere’s stock did nearly 5x better than the broader S&P 500 stock market index in 2020 so far. Why? It could be because we didn’t get too many reports of bad weather!
If you crunch the numbers, farmland correlation to stocks is almost zero. That’s nuts!
5. Volatility is near zero
Some people call farmland investing “gold with cashflow” and I kind of get why.
Farms aren’t going anywhere so the values don’t swing wildly. People keep buying food so the farms keep distributing cash.
My recommendation for farmland investing
Based on all this research, I’m genuinely impressed with farmland investing to both grow and protect my portfolio. Will it blow the S&P out of the water? Probably not. Will it beat a very lucrative pricey rental unit? No those are nuts but you can only own about 1. Can it keep you safe when the everything bubble eventually pops? Probably.
So how do you get in? Well, there are 3 options:
- Buy a farm (or direct farmland investing.) Which is probably not going to happen for at least 100% of my readers. 🙁
- Farmland REITs. But their performance has been surprisingly lackluster and I’m not really a fan of REITs anyway. 🙁
- Crowdfunded investing and eREITs. This seems like the best way to invest in farmland. You get all of the benefits, but none of the headaches. 🙂 🙂 🙂
After doing a lot of homework, my favorite farmland crowdfunding platform is AcreTrader. They have:
- Rent-based cashflow – meaning you get a regular payout for investing.
- Some of the most impressive returns (to the tune of up to 11%/year… which is hard to beat, really. You can openly see past farm exits on thier site too).
- The most reasonable fees, in my opinion. (0.75% management fee, charge a 2.5% reimbursement on the initial investment fee and act as the selling agent and take a cut of the sale, but that’s standard real estate stuff.)
- They deal with the farm evaluation, operation, and rent collection. You just supply the money.
- Plus they already have lots of money under management, meaning less risk since they’re not the new kids on the block.
Read more:
A full explainer of crowdfunded real estate investing and an in-depth review of top eREITs including AcreTrader.
Full and Complete Acretrader Review
The catch is that you generally have to be an “accredited investor” to get in. That basically means that you have to prove that you’re either a millionaire or have a $200K income, individually, or $300K combined income with your spouse. (Most offerings start around $10K.)
Even if you’re not fully ready to invest, I’d still recommend signing up so you can do more in-depth homework, see the actual farms you’d be investing in, and keep tabs on this industry before jumping in.
I do want to especially let people know that AcreTrader does give a kickback to me if people sign up with them. They didn't pay me to write this post, and I wrote it because I do truly believe in the digital platform they set up and the general idea of investing in farmland, although I don't have any opinion about any specific type of farm...that’s what they are for, farms all look the same to me. However, due to financial regulations, I need to put an extra disclaimer.
This is a sponsored promotion for the AcreTrader platform. FiveYearFIREescape may have investments in companies represented on the AcreTrader platform. This informational post is by no means a promotion, solicitation, or recommendation of any specific investment.
TL;DR – Farmland Investing
Farmland is one of the best forms of investments if you’re looking for something historically safe with a lot of potential moving forward. It’s a real asset that can protect against inflation and has a track record of performance.
My recommendation is to go with a fractional farmland platform instead of other options with AcreTrader as my top pick.
It’s good for diversification and also uncorrelated to stocks, which is very positive. The low volatility and low risk could be nice if that’s what you’re looking for. The return of 12% that you mention seems extremely high to me. You certainly don’t get that in my region. 3% would be more realistic here.
So do your homework to see if that 12% is realistic in the long-term.
Here in Europe farm land is considered to be a mediocre to bad investment for the following reasons:
– Farmers demographics: the current generations of farmers are relatively old and no kids or others who want to take over the business, which means more farms and land will come on the market.
– The politics are bad: increases in environmental rules and restrictions, meaning you need to invest more to comply but you don’t get extra revenue or productivity.
– Most farmers are leveraged to the hilt, which not much money for farm land rents and also means an interest hike would be bad for the business.
– The disconnect between food prices and farm land. Food prices go up, so producers of food get more, but not the farmers. There is a big layer between the farmers and the end-customer, consisting of food producers, supply chains, supermarkets etc., who all take a bigger cut of the increased food prices. The farmer, who is at the beginning of the proces, is a ‘little guy’ who only gets a tiny bit.
– The ‘farmers squeeze out’: costs to run the farming business keep going up (utilities, taxes, cattle food, equipment, pesticides, land rents, etc) and revenue lags behind.
Market prices for agricultural prices are suppressed by big companies who effectively set market prices (monopsony).
– Globalization: transport is cheap, so it’s easy to produce the main ingredients somewhere else (which requires the farm land) and process the ingredients locally. The processing part is usually a bigger ‘value add’ nowadays.
– The low liquidity (when compared to stocks at least) and high transaction costs is also not ideal.
Yeah wow ok. Nice comment! Lot’s in here:
1 – Farmland is not so liquid: 100% true but I think that’s part of the advantage. In my REITs vs RealEstate post once of the big downsides of REITs in my eyes was the liquidity which transforms into volatility during market upheaval. I wouldn’t put 100% of my money into non-liquid assets… then I might just go bankrupt from a big medical bill! Farmland is amazing once you are looking for stability and have some liquid money somewhere.
2 – Farmland is complicated (lots of middle people): True. I would never directly own a farm that I sourced as there are too many things I don’t know. There are a new breed of managed farmland companies out there who can do all the processing for me though. When I was doing the research for this article AcreTrader was super supportive and sending all sorts of futures analysis vs crop type vs correlation to rental rates. It got too deep for me to pack into the article but knowing they have that information and analysis is comforting.
3 – Demographics: So this is true, but the counter point at least in America is that most farmland is being eaten up by developers which drives up land value (lots of graphs available :))
4 – Is 12% legit?: I just looked up the currently investable farms on AcreTrader. As per the investment prospectives anyway 3-4% is the planned cashflow and 8-9% is the prospected IRR once you work in appreciation, debt paydown. Many of the contracts have a lot of revenue sharing from the farmer and it seems like the ones with heavier revenue share (seems to track to the more specialty food too) are the ones that hit 12%. So I guess 3% cashflow yes I agree. But my most lucrative house has ~0% cashflow (look at my real estate portfolio post 🙂 ).
Either way love the comments! I hope you post more. Keeping me on my toes!
My comment was not intended to rain on your parade and luckily it was not understood as such. But you have to stay critical and view all sides, which was the reason of my well-intended, critical comment.
The economics and financial numbers definitely work differently per region. I live in the Netherlands, which has different regulations, different market dynamics and different investment numbers.
Here we see food processing companies scaling up big time over the recent years by mergers and acquisitions and farmers lagging behind big time.
For farmers, usually a 2 man business here, in investments are high and there’s national and local political pushback to becoming to big.
For reference, an average dairy farmer here has between 150-200 cows.
Local government would perhaps let you to up to 250 cows, but thats about it. That puts a hard cap on expandability and economies of scale, which inevitably leads to the ‘farmers squeeze out’ which I mentioned above.
Furthermore, food processing can be easily industrialized and stream-lined. In the farming business industrialization is frowned upon, due to concern for animal welfare and such. For agriculture it is easier though.
Still you see food processing companies getting ahead much more and increasing their market power towards suppliers and their customers as well.
In the long term I see multiple negative factors for farming here, which as a result would also limit the appreciation opportunity for farm land.
In your case, with a 8-9% IRR, farm land could form a good and stable base for your investment portfolio. Close to or in retirement, such a stable base would then allow for more risky investments in the portfolio, for more upside in the long run and less change of running out of money.
Leif, have you ever looked into investment-linked annuities for old age?
They offer similar investment features to farmland I think (low volatility, higher stability, stabile income). This could be interesting if you want more security and stability in your portfolio, although I’m not sure if you’re already in this phase of investing….