To say that agriculture is important to the American economy would be an understatement. Almost 18% of the US economy and 30% of the country’s jobs are linked to the sector. Though numerous variables impact these numbers, one thing remains the same: the land beneath the business is big business itself.
Farmland prices have been on the rise since the 1980s. Recent years, however, have seen those prices surge even more, fueled in part by a decrease in the amount of land being used for agriculture. According to a report from the USDA, farm real estate value per acre has hit a record high, increasing by 12.4% in 2022 alone.
For those looking to diversify their portfolio, this farmland boom may offer unique opportunities to not only invest in tangible assets but gain exposure to a burgeoning green economy.
Approximately one in seven American households experience pronounced food insecurity. In a world where farmland takes up more than 44% of all land in the US alone, that might feel… off.
But the problem isn’t necessarily a lack of farmland so much as how the farmland is being used. Shifting social attitudes on the subject present a distinctive opportunity to would-be farmland investors.
Though figures vary and data is sometimes difficult to nail down, it is estimated that livestock land use takes up 80% of agricultural land worldwide while generating only 18% of global calories consumed. Beyond this being an inefficient use of resources, OECD Data suggests this imbalance makes little economic sense, as meat is more costly to produce and more expensive to buy than plant-based food.
It also takes an exorbitant amount of water required to produce meat over crops. Your typical salad (tomato, lettuce, and cucumbers) requires about 21 gallons of water to produce. A six-ounce beef steak, on the other hand, requires 674 gallons of water to produce.
The meat and dairy industries require seemingly endless resources to raise, kill, prepare, and sell animals. With low nutritional and financial yields, this model is ill-advised and unsustainable.
Fortunately for our waistlines, environment, and wallets, plant-based diets have become more popular as people prioritize healthier diets and sustainable food production. Should the trend lead to an ongoing decrease in demand for meat, it becomes more likely that already lucrative cropland will increase in value. With the USDA reporting that cropland acreage is worth more than three times as much per acre than land used for livestock, we’re not talking small potatoes.
The picture painted by these numbers looks like a pretty one for investors. Specifically buying cropland as an investment could put you in the middle of a strong consumer trend. Given the environmental consequences of livestock production and the mounting impacts of climate change, it’s an allocation you can feel good about, too.
Veggies aren’t just for dinner anymore. Buying farmland as an investment gives your portfolio exposure well beyond consumable food items. And we’re not just talking about the demand for biofuels like corn-based ethanol.
As Bob Dylan once sang, “The answer, my friend, is blowin’ in the wind.”
Wind power is in a period of significant growth. In 2021, wind project development accounted for 32% of all energy capacity growth in the US, with 10% of the country’s total wind capacity coming from new developments between June 2021 and June 2022. Though the pace of new wind farm development did slow some in 2022 due to supply chain woes and interconnection delays, experts expect more robust growth in the years ahead.
These developments, however, require one important thing: land.
For investors with patience, this could make investing in farmland a uniquely lucrative play. It also offers a way to gain exposure to the green energy sector outside of the stock market.
It’s no secret that high inflation has wreaked havoc on the economy in the last year. Despite Federal Reserve efforts to reign it in with aggressive interest rate hikes, it still remains stubbornly high. Following Chairman Powell’s Congressional testimony, it appears the rate hikes are likely to continue. Though concerns about this hawkish monetary policy jumpstarting a recession abound, some argue that a recession is the only way to achieve meaningful inflation reduction.
As traditional investment portfolios struggled in 2022, farmland investments shone bright. As one recent article explained:
Unlike mainstream financial assets, which tend to lose value when consumer prices go up, the value of farmland actually tends to rise when prices rise.
The NCREIF Farmland Property Index, which tracks the value of farmland owned by investors, rose 10.2% in 2022 — that’s even more than the rate of inflation, which hit a four-decade high of 9% in June. The S&P 500, on the other hand, lost about 20% of its value over the course of the year.
That’s good news for farmland investors in the current environment. But even if a recession hits, farmland investments could prove fruitful in a few ways.
First, farmland investments are typically uncorrelated with more traditional asset classes. While stocks and bonds, for instance, tend to move in opposite directions of one another, farmland investments march to the beat of their own drum. Like other alternative investments, they can help protect your portfolio if the economy goes into freefall.
Between 1992 and 2020, the NCREIF Farmland Index had a standard deviation of 6.9%. In comparison, the volatility of the S&P 500 was 17.1%. Farmland was also less volatile than publicly traded REITs (18.3% volatility) and privately owned real estate (7.4%).
This low volatility is a win for diversified portfolios focused on risk management.
That doesn’t mean farmland value won’t take any hit during a recession. During the 1980’s recession, for instance, farmland values dropped by roughly 4% – the first decline since the Great Depression.
But during the recessions generated by the 2008 Financial Crisis and COVID-19, farmland saw only lower positive returns – not losses.
For most current investors in farmland, this calculus carries little consequence. These are meant to be long-term investments. Given the historical trajectory of farmland values, short-term losses during a recession won’t outweigh their overall return on investment.
For investors new to the space and well-capitalized, though, a recession presents a great opportunity to get started. If farmland values do dip, investors might be able to get into the space at a discount.
Alas, the illiquid nature of farmland, complexities involved with due diligence, and typically high minimums for investment have prevented many from fully embracing the farmland opportunity. But interested parties will find there are multiple ways to access the space, especially if you’re an accredited investor.
Investors can buy land directly from an owner without an heir, buy farmland and rent it to someone else, or even reappropriate non-farmland for farming. If you want to gain exposure without having to get your hands dirty, investing in farmland real estate investment trusts (REITs) or through a crowdfunding platform such as FarmFundr offers alternative access points.
In sum: you reap what you sow. When it comes to farmland investing, there are certainly compelling reasons to get planting.
Check out the upcoming Earning Green by Investing Green event on April 27, 2023. A one-day event featuring experts from across the green economy, this symposium on navigating the green economy seeks to provide investors, asset managers, advisors, and other professionals with the information and perspectives they need to make smart, ethical, and lucrative choices in their portfolios. Attend in person or stream the event live, but don’t miss out!
This is an updated version of an article originally published in June 2020. ©2023. DailyDACTM, LLC d/b/a/ Financial PoiseTM. This article is subject to the disclaimers found here.
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. Share this article:
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