When it comes to investing in farmland, it's essential to take the long-term approach. Farmland investments are typically held for the long term, as they are considered assets that appreciate over time. While there may be good years with great short-term returns, farmland investment is primarily a hold asset for the future.
In the stock market, investors usually aim for a 10% rate of return, according to sources like The Motley Fool. In contrast, most farmland investors expect a more modest 2.5% rate of return annually. The goal of farmland investment is to hold onto it because they are not making any more of it. Looking back, the average return on farmland has been around 12.5%, according to AcreTrader.
Short-term value of land investments
The short-term value of farmland is all about the money that can be made in the near future. Two key factors that determine short-term value are cash flow and crop production. The Midwest boasts excellent soil quality and favorable conditions for growing crops, enabling farmers to produce high yields.
However, these two factors can be influenced by various others. Fluctuating crop prices can impact farmers' earnings. Government policies, such as subsidies, regulations, and crop insurance also have an effect on farming profitability. This will become a bigger issue as we hear more about carbon credits, regenerative agriculture, and sustainability. Extreme weather events like droughts or floods can damage crops, leading to lower yields and a decline in farmland value in the short term. As we look across the Midwest, the “I” states have good moisture for the most part, but we are all praying for the right weather. What a gamble, but what a relief when we have a million-dollar rain.
Long-term value of land investments
The long-term value reflects the anticipated worth of farmland in the future. Over time, farmland tends to increase in value due to several reasons. In the past two years, we have seen significant appreciation around 42%. Farmland becomes scarcer as available land for farming diminishes, leading to further appreciation. As we look back a few years, we have seen the perfect storm: low interest rates; increased government payments related to covid, trade, and extreme weather; a rally in demand from China for grain; corn prices moving from $3.50 to $7, low supply, and a whole lot of equity. For example, in Iowa 83% of farms are paid for free and clear, according to research by Iowa State.
Furthermore, farmland serves as a long-term investment that helps protect against inflation. As general prices rise, the value of agricultural products tends to increase as well. Consequently, owning farmland can help maintain its value and serve as a safeguard against inflation.
As an auctioneer and real estate broker, I see some people want to sell farmland to invest in the stock market for a higher return. Conversely, I have seen people cash out their 401K to buy into the security of farmland at a lower short-term return. Balancing short-term and long-term values is crucial when making farmland investment decisions. Consider both the immediate profits that can be made and the potential for farmland to appreciate over time. Analyze current cash flow and crop yields to assess short-term profitability, taking into account factors such as crop prices, government policies, and weather patterns. It is equally important to evaluate the long-term prospects of the region, including population growth, infrastructure development, and the overall economy.
Successful land buyers also look for opportunities to improve the land, such as removing trees to create additional acres or implementing drainage systems to increase production. One thing that I see is that people invest in what they know. If you don’t live in the Midwest and you inherit a farm but know nothing about farming or farmland, you are more likely to sell and reinvest in what you know. If you live in the Midwest and have seen the annuity provided by a long-term hold of the asset you purchased years ago; arguably, you want to invest in more.
FAQs
When measured on a risk-return basis, farmland compares favourably to other asset classes, demonstrating strong returns per unit of risk. Farmland investments provide resiliency through rising interest rate environments and has exhibited positive performance through every period of increasing interest rates.
Is investing in farmland worth it? ›
Furthermore, farmland serves as a long-term investment that helps protect against inflation. As general prices rise, the value of agricultural products tends to increase as well. Consequently, owning farmland can help maintain its value and serve as a safeguard against inflation.
Why do the rich invest in farmland? ›
Hedge against inflation. As inflation climbs, many investments can plummet in value. Farmland, on the other hand, has seen its value increase during inflationary periods, making it an effective hedge against rising prices. This cushion can be particularly valuable to those with an ultra-high net worth.
Why is Bill Gates investing in farmland? ›
He responded, “I own less than 1/4000 of the farmland in the US. I have invested in these farms to make them more productive and create more jobs. There isn't some grand scheme involved - in fact, all these decisions are made by a professional investment team.”
Is farmland a good investment in 2024? ›
Likely, we can expect farmland values to plateau in 2024 or at best, achieve a slower rate of growth, year-over-year, of under 5%.
Can farmland pay for itself? ›
By using your land wisely, you can make it pay for itself. Stepping into agriculture brings financial rewards with sustainable farming practices, reducing costs over time. Leasing unused portions to local businesses also provides steady income streams.
How much farmland did Jeff Bezos buy? ›
Jeff Bezos, your friendly founder of Amazon, recently purchased 400,000 acres of farmland in Texas. Other real estate billionaires have bought thousands of acres in Indiana, Illinois, Iowa and Florida according to Hansen Land Brokers, Inc.
What is the ROI on farmland? ›
U.S. Farmland Returns
Over the last 20 years, United States farmland has offered average returns of 12.75%.
How to get rich from farmland? ›
Here are 15 farming ideas, each with its own unique angle on profitability, requirements and potential market.
- Specialist vegetable farming.
- Organic crop product.
- Herb gardening.
- Beekeeping and honey production.
- Aquaculture.
- Agrotourism.
- Livestock breeding.
- Mushroom farming.
Farmland Is A Safe Haven Investment
Farmland is a low-volatility asset class that acts as a store of value in turbulent economic times. Compared to gold, another safe haven investment, farmland offers the additional benefit of passive income.
The Land Report 100 research team analyzes transactions and scours records to determine America's leading landowners. That's how we broke the news in 2020 that Microsoft co-founder Bill Gates was America's largest farmland owner with more than 260,000 acres.
How much farmland does China own in the United States? ›
China owns 384,000 acres of American agricultural land. That's a 30% increase just since 2019. And on top of that, they own land near an air force base in North Dakota.
Which tech billionaire bought land in Nebraska? ›
Over the past six years, billionaire Bill Gates has spent more than $113 million purchasing Nebraska farmland and has taken out two loans totaling $700 million against it. Gates owns about 20,000 acres of farmland in Nebraska, where longtime friend and fellow billionaire Warren Buffett resides.
Why are billionaires buying farmland? ›
Farmland investing gives hope to investors in hedging against inflation, searching for heightened investment returns and security on future exit valuations and purchase prices. It is a valuable asset class that continues to be profitable, even during economic instability.
Is it smart to invest in farmland? ›
Farmland produces returns both with rent yields and appreciation in the farmland's value. So these investments can work somewhat like dividend stocks, with gains from income and capital gains. This combination of appreciation and rent yields has led to consistently strong performance.
Is farmland a good passive income? ›
Farmland is a Good Source of Passive Income
According to the USDA, there are roughly 911 million acres of farmland in the United States and over half of the cropland acres are rented out. You can produce passive income on your land in three major ways: Rent to tenants who wish to grow crops or raise animals.
What is the average return on farmland? ›
Over the last 20 years, United States farmland has offered average returns of 12.75%.
Is land a better investment than stocks? ›
You should take your financial objectives into account when choosing an investment strategy. Stock investing may be a more effective approach for those wanting higher returns over a shorter period. Real estate may be ideal for those who want a stable flow of income and can wait to see a return on their investment.
