“Buy Land. They Don’t Make It Any More” (Mark Twain)
In the realm of investing there are what we call traditional investments and alternative investments. Traditional investments typically cover what you and I know best (or are at least the most exposed to): Stocks, bonds, and cash. These are highly liquid, publicly available, and correlated to the markets.
Alternative investments are usually less liquid, both publicly and privately available, and less correlated to the markets. They take many shapes and forms, but there are essentially two types:
- Investing in the traditional assets listed above but using alternative strategies: Short-selling (Gamestop anyone?), leverage, and the use of derivatives (e.g. futures and options) for example.
- Different investment vehicles: Collectibles, derivatives, Real estate (including raw land or farmland), cryptocurrencies, private equity, peer-2-peer loans, wine, art, etc.
Among those exotic-sounding investment opportunities, there is one that has particularly drawn my attention lately and that is investing in farmland. The lack of land is a real debate here in Luxembourg and this is the one that is closest to real estate and that feels “tangible”.
Although alternative investing has an exotic or exclusive tone to it, farmland investing is actually a synonym for investing in one of the oldest possible forms of food production.
What is Farmland Investing?
Farmland investing has been around for ages. In its simplest form, it entails investing in land housing a variety of crops, such as cornfields, that produce corn and wheat for our everyday food consumption.
We all have to eat so in this sense farmland investing is a solid (and recession-proof) foundation that has a place in your investment portfolio.
Historically, farmland has been predominantly owned by generations of families who own a single property and farm it themselves. However in more recent years “non-own operators” (i.e. investors) have begun to own their fair share of US farmland (around 30%).
These investors lease the land to operators to ensure a revenue stream. Farmland has also gained the interest of institutions with alternative investment allocation due to the low correlation with the markets (i.e. these assets do not follow the same trend) and can protect against inflation. To illustrate this gain of interest in 2005, there were fewer than 20 farmland funds operating around the world, and by early 2020 there were already 166 of them representing total assets under management of $38 billion.
Farmland investing comes in 3 main categories:
- Row Cropland: These are the annual crops such as corn, wheat, soybeans, cotton, and rice for example.
- Permanent Cropland: Here we are looking at fruit and nut crops.
- Livestock: Livestock investment includes land leased to local operators for grazing or simply direct ownership of cows, pigs, horses, and sheep among others.
In terms of investing one can classify them as follows:
Is It Worth Investing in Farmland?
Only 7% of land worldwide is suitable for cultivation and most of the world’s cultivable land is already in production. With an expected population growth from 7,7 billion to 10 billion by the year 2050, the demands on agriculture will be 50 to 70% higher than today. With these figures in mind, it is easy to see that supply and demand will drive the value of farmland in the coming years (and decades). Of course, new technology and farming techniques will improve productivity but still there remains a wide gap to fill and land that will appreciate.
And talking about new techniques: Capital investments in drainage, water-efficient irrigation, and so on can improve farmland production income and future productivity as well, which will be essential components to the valuation of the land.
The returns in the farmland industry will come from lease income and asset appreciation as mentioned above.
So what do the numbers tell us? And what can we find out from past history?
The best way is to look at the performance of the NCREIF farmland Income Index which tracks the total return to farmland owned by pension and investment funds of US farmland (see it as “the S&P500 for farmland investing” if you wish). This index has tripled since 2000 and the trend is similar in other parts of the world.
In terms of annual returns, farmland investing has returned 10,5% since 1970 and has shown to be relatively stable. (and not volatile like today’s stock market!)
This all looks fantastic but as with any investments, there are also risks involved. These come in the shape of fires, droughts, pest invasion, animal diseases, these are all events that can occur at any time (think of the California wildfires in 2018) and that could lower or even wipe out your returns. Diversification in various states and crop types could help you however mitigate the risks here.
So, although farmland remains a risky investment (like any other investment), it is definitely a high-quality investment that can help diversify and strengthen your investment portfolio.
How can you invest in Farmland?
The 1st and obvious one: Buy a farm and grow crops! Even if Warren Buffett himself (and he is not the only billionaire to own farmland by the way) invested in a farm in Nebraska for $10,000 before entering high school, this is not so easily accessible for us passive investors 😅.
Luckily, it does not have to be that hard. High net worth individuals can invest through an institution and for us, everyday investors, we can invest in a farm REIT* like Gladstone Land Corporation ($LAND) or we can invest more directly through FarmTogether!
FarmTogether is a Data and Tech powered crowdfunding platform for farmland investing. The team behind FarmTogether has extensive tech, agriculture investing, and institution experience with a genuine interest, or I should say a compelling mission to support sustainable and profitable farming by leveraging technology and removing the barriers to entry to farmland ownership, all the while providing individuals, their investors, with an opportunity to share in the rewards from farming.
*Real Estate Investment Trust
How it works
How does investing with FarmTogether work?
- FarmTogether selects farmland investing opportunities after due diligence is performed. This goes into quite the details: Soil investigation, water rights, and so on. Once reviewed the investment committee puts it on the website as an opportunity.
- The investment offerings are legal entities/companies. You are essentially purchasing shares of these companies (LLCs) and are entitled to the return of these, just like dividends in the stock markets. Nothing fishy here, this is a common practice as in the case of Reinvest 24, an Estonian real estate crowdfunding platform that uses SPV´s to acquire their properties.
- You can monitor your investment during its lifecycle (this is annually appraised) and you will get the recurrent net revenues from land leases (depending on the type of investment you make)
- Receive the cash dividends (yay!) on a quarterly or yearly basis (again, this will depend on the type of investment you will make)
- At the end of the target cycle, the shares are sold (the company is then dissolved) and you will get your principal back plus capital gain.
Additional points to consider
If you are looking into participating in this opportunity.
- FarmTogether provides an attractive opportunity to invest in Farmland.
- The average annual returns have been 10.5% since 1970 which is in line with the 10.9% of the S&P500 (and with fewer variations).
- Farmland investing is for long-term investors: The hold periods are between 5-10 years and the investment is relatively illiquid (there is no secondary market yet where you could resell your shares).
- FarmTogether has written this document on the risks you need to consider before you pull the trigger on an investment.
Would I invest in it? Here is my “Joney score”
I really like how farmland investing is being made available to more of us by the use of modern technology. The sustainable aspect of Farmtogether‘s mission makes it an appealing opportunity as well. Now, there are essentially 2 reasons why I cannot give it a full 5/5 score. The first one is that the platform is currently not yet available to retail investors and I do not have the exact qualifications for us outside of the US. The second reason is that the “ticket to entry” is 15,000 USD. Fifteen grand may sound like a lot if you want to test the platform with “fun money”, it is a commitment but not an unreasonable one compared to say, my 2 parking spaces 😉. So as a minimum I hope that even more investors can participate in the future.
Reliability – 3/5
The team is experienced and they know what they are doing. Now, like many other alternative investing platforms in the industry (Vinovest or Masterworks for example) the company is relatively young so there is no significant track record yet and I have not used the platform myself.
User-friendliness – 4/5
Based on their website, I would expect easy and intuitive navigation I am a registered user but again I have not tested it fully. Now, the company is pretty active on social media, they are easily reachable and their CEO Artem is regularly hosting talks on Clubhouse and through webinars. So they are keen to bring out the good word and talk to their customers.
Fees – 4/5
You pay an annual 1 % management fee plus a 1-2% commission on your investment amount. While being higher than in your traditional index fund, for the industry this is relatively low and in line with the competition. This can be attributed to the fact that deals in farmland are not too complex.
Risk – 4/5
Based on my research and due to the similarity with traditional real estate, this is the alternative asset type I am the most comfortable with. However, this does not mean that this is not a risky venture and you will still need to do your own research and evaluate the risks. Frankly speaking, I only discovered yesterday that the market for almonds has been growing significantly in the past 30 years, so even though I feel comfortable, there is some study work to do before putting in my first dollar 🧐. Due to the illiquidity of this investment method, the Buy & Hold strategy is the way to go if you intend to profit from this type of investment. FarmTogether was founded in 2017 which makes it both a modern platform but as well a platform with a limited track record. Time will tell how investments have worked out.
The platform gets a “Joney score” of 3.8/5 which is very good considered I have not even used it. If it becomes more accessible and we see a positive track record and extensive customer feedback, the score will easily go up to 4-4.2. Right now investing in farmland is not my priority but I could easily consider investing if the minimum investment requirement drops and after more thorough research.
Bringing it all together
Investing in farmland can be a great diversification to your asset portfolio as it is uncorrelated to the markets. It is, I must say, the least “sexy” of all alternative investments but I really like the compelling mission of FarmTogether.
Farmland investing remains nevertheless a high-quality attractive investment opportunity that absolutely has its place in your asset portfolio as it can help to protect and to strengthen it further. It is a long-term and relatively illiquid investment that will serve the patient investors best.
People already looked funny at me when I said I invested in parking spaces back in the days, imagine how will they look at you when you tell them you invested in an almond farm 😅!
What about you friends? Have you considered investing in farmland? Do you know anyone that could be interested? Make sure you share this post with them and let me know in the comments if you have any questions or experience with it!
PS: If you are new to investing, this may not for you yet. I am not a financial advisor but getting familiar with more traditional investments might be a better starting point.
Disclosure: This post may contain affiliate links. That means I may make a small commission (at no cost to you) if you make a purchase. This will help to support Joney Talks!