By Dr. Jim Dahle, WCI FounderMany investors wonder if farmland investing should be part of their portfolio. Like other “alternative” investments—such as cryptoassets, art, precious metals, viaticals, reinsurance, commodities, peer-to-peer loans, oil/gas, or venture capital—farmland is completely optional to a successful portfolio. My portfolio consists of relatively boring stocks, bonds, and real estate. However, some investors have decided to add farmland to their portfolio, and their arguments can be fairly convincing.
Is Investing in Farmland a Good Idea? The Case for Farmland Investing
When building a portfolio, an investor wants asset classes that have high returns and low correlation with the rest of their portfolio. It is also helpful if you can invest easily in that asset class with low fees, minimal hassle, easy diversification, and plenty of liquidity. That part is usually a lot trickier when it comes to alternatives.
High Returns
This chart published by AcreTrader makes the case pretty effectively for high returns.
The colors are a little tricky to see, but from 1990-2021, the highest-returning asset classes were publicly traded real estate, stocks, farmland, timber, and private real estate. The order of these asset classes changes all the time. For example, if this period had included 2022, public and private real estate returns would be much closer to each other. But the point is that farmland (and timber if you want to consider it separately) have high returns. Their returns are similar to stocks and real estate and are significantly higher than bonds, CDs, gold, and other low-returning asset classes.
Low Correlation
What about correlation? Well, farmland has actually had a negative correlation with stocks and bonds over the last three decades. It has moderate correlation with private real estate (0.45), but that's still pretty good considering the correlation between US and international stocks can be as high as 0.8 or even 0.9 and the correlation between stocks and REITs is typically something like 0.5.
Farmland meets my criteria for low correlation, too.
Is Farmland Easy to Invest In?
This is the part where farmland breaks down, at least until recently. For many years, it has not been easy to get liquidity, minimal hassle, diversification, and low fees with this asset class. It's easier now than it has ever been, but it still isn't like buying a total stock market index fund. I also worry that, as it becomes easier to invest, returns will fall and correlation will rise.
More information here:
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How Can You Start Investing in Farmland?
There are lots of ways to invest in farmland.
Direct Investment in Farmland
The most basic and straightforward method of investing in farmland is to go out and buy land yourself. You can even farm it yourself if you want, but if you're looking for an investment, you're probably thinking of renting the land to a farmer. In a lot of ways, this is just a subcategory of real estate investing. You can rent apartments, or you can rent a pasture. Same, same. Your return comes from appreciation of the land and the income paid by the renter. If you have a loan on the property, some of the return comes from paying down the mortgage too.
Farmland Syndications
Don't have a few million lying around to buy a 500-acre farm? Join the club. Just like with a big apartment complex, you can band together with dozens of other investors and syndicate a farm. Usually set up as an LLC or limited partnership, the investors hire a manager (more likely the manager, or general partner, goes out and finds the investors), buy a farm, and then sit back and enjoy the mailbox money coming in for a few years. Five or 10 years later, they sell the farm and split up the profits.
Just like with real estate, there are online platforms that facilitate the formation of these syndications for an additional fee. These include AcreTrader, our partner in this space, and platforms such as FarmFundr, FarmTogether, Steward, and Harvest Returns. None of these have particularly long track records. A decade in business would be an eternity for these platforms. AcreTrader, for example, was founded in 2018. A quick glance at its track record in March 2023 shows only five projects having gone round trip (with IRRs ranging from 11.5%-30.3%) while 103 projects are currently in progress and two are currently available for investment.
Publicly Traded Stocks
Just like with real estate and oil and gas investments, you don't have to leave publicly traded equities to invest. There are stocks traded every day that invest in farmland. OK, not a lot, but there are some. Consider the specialty REITs Farmland Partners (FPI) and Gladstone Land Corporation (LAND). Want liquidity, transparency, and convenience? You can just buy those. You'll have the same issues you have with more traditional public REITs, of course. That's mostly the higher correlation with the overall stock market. These aren't huge companies either. Both are only worth around a billion dollars each. You also already own them if you own a total stock market or a REIT index fund, so putting more money into them is just tilting your portfolio toward farmland.
Mutual Funds and ETFs
The problem with individual stocks—even companies that own hundreds of farms like these two REITs—is almost as bad as buying an individual farm or even a handful of farms via syndications. You're not diversified. There are single property risks and manager risks. The most natural approach to minimizing these risks is to diversify using a fund of some type. However, you have to be careful and look under the hood. If you search for a “farmland ETF,” you will find them, but what most of them do is buy crop futures contracts. This is an investment in the commodities that farmland produces, not in the farmland itself. That investment comes with all the problems that you see with commodities investments. Other ETFs invest in agriculture companies. These are investments in farmers, not the farmland itself. Look at the Fidelity Agriculture Productivity Fund (FARMX). The top holding (23% of the fund!) is John Deere, a tractor manufacturer.
Frankly, there just aren't enough farmland REITs to have a fund that invests in them.
Private Funds
What about in the private world? Can you invest in a private fund that truly invests in farmland? There are a few. Most are aimed at the institutional investor with very high minimum investments. Farmland LP is a private farmland REIT with a $50,000 minimum investment, and it charges 1.75% plus 20% of profits above a preferred return of 6%. Those are a little higher than you see with many real estate funds that WCI recommends.
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How Does Timber Investing Work?
You may or may not consider timber to be just a subclass of farmland, but it has a rather impressive track record on its own. Here's the fun part about timber: unlike most crops, if you don't like the price you're being offered for your lumber, you can just wait until next year and those trees will just keep on growing. You can buy timberland directly, buy publicly traded timber REITs (Weyerhaeuser, Rayonier, PotlatchDeltic), buy syndications via the platforms above (AcreTrader has offered seven timberland investments over the years; none have gone round trip), or buy private funds or even a dedicated account with your own manager. The private funds are again mostly aimed at institutional investors with very high minimum investments. There is an index for private timberland REITs, but when you dive into it, there are only 464 total properties in the index. This is a pretty niche investment.
What to Do? Should You Start Investing in Farmland?
If you want to invest passively in farmland—and I stress that this is a totally optional investment—using a platform such as AcreTrader is a reasonable approach for a small percentage of your portfolio. Investment minimums are relatively low ($25,000 or less) so you can buy 10 properties and achieve a certain level of diversification with just a quarter of a million dollars. Note that this approach will result in you getting 10 K-1s, and you likely will have to file taxes in multiple states. If that sounds like too much of a hassle, you can buy the publicly traded farmland and timber REITs at your favorite brokerage. Or just do what most investors do and buy total stock market and REIT index funds and know that some tiny portion of your money is invested into farmland and timber.
When people brag about their farmland investments at cocktail parties, you can confidently say that you own some of those, too—just like you can say you owned the latest high-flying stock before it became popular.
If you are interested in private real estate investing opportunities, start your due diligence with those who support The White Coat Investor site:
Featured Real Estate Partners
What do you think? Do you invest in farmland? Why or why not? How do you do it?
Just to add some positive experience with AcreTrader, the K1 forms are certainly a pain for your taxes but AcreTrader does a great job at getting them to you “early” (for the world of K1’s). The 2022 K1’s were all delivered in the first week of March, 2023. They also seem to be pretty conservative in their underwriting of rents for row crops as the actual payments have been higher than expected. It is an interesting asset class with relatively infrequent “dividend” payments. Row crops generally pay out the rent once a year but anything you buy after the middle of the year is unlikely to have a rent payment going to you that year. Timberland pays out every few years and as best I can determine has some fire risk (when I’ve asked, there doesn’t appear to be any practical way to insure against forest fire for the offerings I’ve seen). Development from the ground up of a permanent crop might mean 7-10 years before any net cashflow. My experience has been that you’ll never really understand how many things can go wrong with an asset class until you own it (don’t get me started on how exacting the weather must be for optimal orchard yields or the ongoing almond glut) so this is definitely a small slice of asset allocation at most and optional under any circumstances.
So happy you’ve had a wonderful experience. I know a number of other Acretrader investors who are also very happy with their investments.
Good point on the fire risk. I should have mentioned that!
I purchased farmland in Minnesota in 1999 as a way to diversify away from paper assets. Started out renting the land and quickly realized that the high tax bracket we were in meant about half in rent money was going for state and fed taxes. Made the decision to go actively into farming. Decided on hay and cattle. The business showed active losses that came right off all our income. Depreciation was magic. The tax code was working for us instead of the other way around. I think the key point was to be active rather the passive. Very important distinction in the tax code. Glta.
Yes, just like Real Estate Professional Status for real estate investors, the tax breaks are better for farmers than farmland investors.
Grandpa and Grandma invested in farmland for us a century ago, and left us (3) half of it, and then Mom’s finances arranged for us to invest further in her half. So I’m 1/3 owner a quarter section in the west. Bro has been buying out Sis whose finances encouraged that. Our cousins hunt on it and strangers dump garbage on it and a Hutterite colony farms it, no longer organic though (as the Grands did). The Grands used to rent it out for a crop share after they quit farming themselves, we get money. May sell it to the Hutterites end of this lease. Rent is better now a great uncle insisted we boost the rates first time in decades, since the ethanol boom had made it much more expensive for the Hutterites to buy corn for their hogs rather than grow it. I’m sure the syndicate managers will take the place of my uncle and maybe even charge hunters (or offer syndicate owners an annual visit?) and fend off dumpers. Won’t bother replacing it when we sell, but until I was well out of the Army returning there to farm it was a fantasy. However I realised (and told my cousin the sheriff who was lobbying for this) that free service for all my cousins and aunts would bankrupt any medical practice I opened.
Great article!
In addition to $FPI/$LAND single-stock names, also worthwhile to consider The Garden City Company (ticker $GCCO), which owns 26,970 total acres of cropland in southwest Kansas (18,433 of the acres are irrigated), which is leases to tenant farmers on a crop share basis. In addition, the Company receives oil and gas royalties from wells maintained by third parties on Company property.
At the recent price of $1,730/share with a 4.6% LTM cash dividend yield, this implies an enterprise value of $50.3m, or $1,866/acre total, for The Garden City Company. If one assumes $1,000/acre for their dryland ownership, the implied valuation for the 18,433 irrigated acres of only $2,267, which is a >30% discount to the most recent K-State Land Values report 2022 average of $3,233/acre for SW Kansas. Finally, as $GCCO is a c-corp, you don’t have to deal with K-1s or other complicated tax filings and can own in your IRA/401k/etc.
More details available here:
https://www.otcmarkets.com/otcapi/company/financial-report/362263/content
https://www.agmanager.info/land-leasing/land-buying-valuing/kansas-land-values-book-2022
What’s your relationship with that company?
No relationship with the company!
I am just a common shareholder that thinks it is a worthy investment, especially relative to 1.75%/20% carry fee private funds or non-relevant ETF/mutual funds mentioned in the article….
Thank you!
I am marrying a doctor and I work in produce. I own part of a 500 acre farm. We actively grow on it. It is a great way to show a loss on your taxes, however, farming is not for the faint of heart, especially fresh market produce (fruits & veggies). It is a massive capital investment as well as a lot of legal hoops to jump through. They take a lot of time to run, and it is very difficult to find good help.
If you still want to farm since farming has such great income & tax advantages, choose something less labor intensive. Hay, timber, maybe cattle. Maybe a great project for someone nearing retirement & who lives in a more rural area!
Second note – I live in a city in the south and farm, so this is possible if you don’t live in a rural area!
Overall – we are happy for the tax benefits and the direct benefits to my job.
Another great, balanced piece. I wanted to expand on your comment about the possibility that the correlation of farmland and stocks may increase as farmland gets easier to invest in (and more popular). To me, it seems like this has happened for REITs. You cite a correlation of REITs and equities of ~0.5, but over the past 20 years it has been closer to 0.75 and in the last five years it’s been about 0.85. That convergence seems more likely when investments get really liquid.
Maybe more of a reason to stick with illiquid investments in this space?
Farmland investing looks attractive.
The 800 pound gorilla in the room is climate change.
Some properties like almond farms in California offered by AcreTrader have the potential to go to zero, with reductions in water allocations that are likely on the near horizon. Forest fire for timber was mentioned, and in the context of a changing climate, this risk will increase. Costs across the country will go up as well to deal with heat and worker safety.
If I were going to invest in this space I’d likely invest in some of the farms in the upper midwest that are offered, and will be relatively safe bets for the near term, maybe not long term (decades).