Buying farmland as an investment has been popular since the 1980s, when the value of farmland had an upward trend of appreciation for several decades. But by 2014, that trend had flattened. Though farmland prices are not growing at the same rate they once did, there have been increases in certain parts of the country (e.g., Pacific and Delta states). Furthermore, values still remained high through 2019 at an average $3,160 per acre, according to the USDA.
In the end, investing in farmland may be a potentially fruitful move for those looking to hold an overall stable, tangible asset.
As the world’s population continues to increase, limited land availability, fresh water constraints and declining growth in crop yields continue to threaten the food supply. In addition, consumption patterns continue to favor meat consumption.
However, according to OECD Data, “as compared to other commodities, meat is characterized by high production costs and high output prices.” Take the exorbitant amount of water required to produce meat over vegetables, for example. To put it into perspective, your typical salad (tomato, lettuce and cucumbers) requires about 21 gallons of water to produce, in contrast with a six-ounce beef steak, which requires 674 gallons of water to produce. The meat and dairy industries require endless resources to raise, kill, prepare and sell animals. Not only is this costly to our environment, it is extremely unproductive.
But why is the meat industry in such high demand? According to the OECD, “Meat demand is associated with higher incomes and a shift—due to urbanisation—to food consumption changes that favour increased proteins from animal sources in diets.”
On the opposite spectrum, there is a plant-based trend growing as more people view consuming plant-based products as more sustainable than consuming meat. Buying farmland as an investment could put you in the middle of a strong consumer trend as more people explore health through food. As more and more people convert to plant-based diets (because of health or environmental concerns), the demand for crops will continue to increase.
Historically, the premium value of crop land over pasture land is nothing new, and in 2019, the USDA reported that values for crop land were higher than pasture land in every area but the Southeast. In the Pacific, for example, crop land is worth four times more than pastureland. As more and more people convert to plant-based diets (because of health or environmental concerns), the premium value of farmland and demand for crops will very likely continue to increase.
Veggies aren’t just for dinner anymore. Buying farmland for an investment could extend well beyond just consumable food items. Growing crops that are also used to create biofuels, which remain in high demand, would be a realistic and viable pursuit as well. And don’t forget about the use of farmland for wind farms.
In 2019, the U.S. Energy Information Administration reported that electricity generation by wind turbines represented 7.3% of total U.S. utility-scale electric generation. Consider the fact that since 2000, wind-generated electricity increased from 6 billion to 300 billion kilowatthours (kWh).
Further, one particularly powerful trend that stands to dramatically increase farmland values has yet to be felt: inflation. Inflation is the general increase in prices of goods and services over time, and farmland is an asset that is proven to be resistant to inflation and economic turmoil, as food is always in demand.
Both of these factors combined practically ensure a high performing portfolio for those exploring buying farmland as an investment.
Alas, the illiquid nature of farmland has prevented the investment community from participating in past and future appreciation of farmland. Traditionally, most farmland has been passed down from generation to generation by succession, leaving investors “out of the game.” However, in recent years, there have been increased opportunities attracting investors interested in buying farmland as an investment.
Investors can buy land directly from an owner who does not have an heir, buy farmland and rent it to someone else, or even reappropriate other land as farmland. But, if you want to invest in farmland without having to get your hands dirty, you can also invest in farmland real estate investment trusts (REITS), which is traded like stock, or through a crowdfunding platform, such as FarmFundr.
Investing in farmland combines the allure of a tangible asset with annual returns of 12%. In other words, buying farmland for an investment, along with maintaining a diverse portfolio, may be a smart bet for future financial success.
[Editor’s Note: To learn more about this and related topics, you may want to attend the following webinars: Investing in Commercial Property and Due Diligence Before Investing. This is an updated version of an article originally published on February 2, 2018.]
©All Rights Reserved. June, 2020. DailyDAC™, LLC d/b/a/ Financial Poise™
A passionate environmentalist and animal rights’ advocate, Sophie Friedland is dedicated to the idea that furthering these imperatives and being financially successful are not mutually exclusive. A college Freshman at the time of her first submission to Financial Poise, Sophie is Financial Poise’s youngest-ever contributor.
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