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THE MAIN STORY: INVESTING IN FARMLAND

“I’d rather own all the farmland in the U.S. than all the gold in the world“

— Warren Buffett

Farmland isn’t the first place investors look to when trying to maximize returns or diversify their portfolios.

Still, with billionaires like Bill Gates snapping up hundreds of thousands of acres, there must be a good reason for interest in this multi-trillion-dollar asset class.

For Carter Malloy, the CEO of AcreTrader, there’s a lot to love about farming. In a past interview with Stig Brodersen, Malloy gives the full rundown. 

Breaking it down

He says, “one of the reasons that (farmland) has always been attractive, I believe will remain so, is that it can serve as a hedge against inflation.”

See, it produces one of the core components of inflation statistics: food. He argues that farmland historically has rivaled gold as an inflation hedge, with the bonus of producing income.

He explains that “(farmland) has put up some really great risk-adjusted returns, low double-digit types of returns, with low volatility as well.”

The thesis

According to the non-profit Farmland Trust, the U.S. loses about three acres of farmland every minute due to development. In other words, the supply of farmland is often decreasing, yet demand is growing as we have more and more people to feed.

Of course, improved productivity in farming has enabled this shift, as we can generate more food with less land. And new technologies will almost certainly continue optimizing production in the future, yet these improvements may be less dramatic than in earlier periods of the industrial revolution. 

The world’s food supply remains incredibly fragile given the planet’s growing population, evidenced by many of the disruptions we’ve seen over the last year, including Russia’s invasion of Ukraine, one of the world’s largest wheat and fertilizer producers. 

As an asset class, the thesis generally is logical: the supply of farmland is decreasing while demand for food is increasing, and productivity improvements are unlikely to fully offset that difference. 

Therefore, the farming operations and their underlying properties are expected to become more valuable from rising food prices and demand for land development, respectively. 

The picture is, naturally, more nuanced, with variations by region in land quality, crop types, environmental regulations, etc.

How do we get paid as farmland investors?

Mallow highlights that about 40% of U.S. agricultural lands are absentee-owned, meaning it’s not the farmers who own them. 

The landowner charges farmers rent as a landlord would in an apartment building, but the farmers typically make these payments semi-annually or annually. Unlike apartment rentals, this industry sees much lower vacancy and default rates.

Investors receive cash flows from rental payments while also benefiting from increases in land value. These land value increases can stem from real estate prices rising broadly or from food prices rising and making that land’s output more valuable. 

Permanent versus row crops

This description fits the majority of American farmland, which utilizes row crops.

Within the farmland asset class, there’s a possibility for diversification with lands devoted to permanent crops, too. These crops grow on vines, bushes, or trees, like apples, oranges, olives, and almonds, as opposed to row crops like corn or soy. 

In permanent crop investments, the investor usually owns both the underlying land and the trees, which adds more direct exposure to commodity prices. For example, in owning almond trees, your profits would be tied to swings in almond prices.

Consequently, returns tend to fluctuate more for investors in permanent crops.

Tradeoffs

Malloy details further that in row crop investing, due to its more standardized outputs, cash flows from crops tend to fuel returns less than land prices because the land may have more flexible uses and can appreciate faster if it’s a quality parcel than permanent crop properties. 

With permanent crops, because the land is devoted to more specialized purposes, land price increases tend to be modest, especially considering that the value of your assets on that land (i.e., grape vines, olive trees, etc.) naturally depreciate after they hit the peak production points in their lifecycle. 

However, prices for permanent crops tend to have more upside, meaning they produce better cash flows over time.

Takeaways

So the return profiles can be quite different for row crop or permanent crop investments, where one (row) drives most of its returns from land appreciation and the other (permanent) earns most of its returns from commodity price appreciation.

While the asset class hasn’t seen a down year since 1990, according to Malloy, it’s not the kind of bet to make you rich quickly.

He says further, “You’re not going to go buy a piece of farmland and turn it around the next year and sell it for double…it’s all about compounding over time, call it an old school Buffett mentality of buying quality assets that are simple and allowing your money to work for you.”

Farmland investing represents a formidable long-term store of value with reasonable return prospects backed by real, physical assets, as opposed to paper IOUs from governments with historically low inflation-adjusted yields via bonds (even with the rise in interest rates in the past year).

Dive deeper

To zoom in on specific investment opportunities in the farmland space, AcreTrader is an excellent resource.

And to hear Carter Malloy’s full interview on farmland investing, you can listen to it here. 

*For full transparency, AcreTrader has been a sponsor for our podcasts and newsletter periodically, but this is an unpaid write-up. Like most of you, we’re also learning about farmland investing, and AcreTrader is a leader in this space.