Farmland Investing: A Smart Strategy Made Smarter by Farmland LP’s REIT

Two articles recently appeared in the news on farmland investing that demonstrate why Farmland LP’s value-added approach and niche market focus – organic and local – make for smarter farmland investing.

The Economist’s article, Barbarians at the Farm Gate, describes the benefits of farmland investing through an institutional lens. The Economist makes a convincing macro case that productive farmland has historically been an excellent investment, often dubbed “gold with a coupon”, because it offers both appreciation and cash flow. Consider this: From 1970 to 2009, agricultural land values, as reported in the U.S. Department of Agriculture’s Economic Research Service database, outperformed both domestic stocks and bonds on an annualized basis, returning 10.25% compared to 6.24% for the S&P 500 and 7.3% for 10-year Treasuries.

Institutional investors own only 1% of the $2.4 trillion of U.S. farmland. Most farmland is owned by families and individuals, passed down from one generation to the next, and the market for buying and selling farmland is very local and highly inefficient, presenting a barrier to entry for investors interested in this asset class. However, demographic shifts, namely the retirement of farmers (per USDA statistics, the average age of principal farm operators is 58 and one-third are 65 or older) and the younger generation not taking over the family business, will result in billions of dollars of farmland changing hands over the next decade, with relatively few institutional buyers in place.

Economist Article chart

Farmland has performed well when compared with other assets categories (see excerpted chart, above), generating superior annualized returns and lower volatility. Investor interest will continue to grow, but key to sustained value is creating investment vehicles that venture beyond the typical investment strategy of chemical-dependent commodity crops.

Pensions & Investment’s article,’Moving beyond buy-hold-lease strategies‘ states that farmland for row crops, like corn and soybeans, “often account for more than 60% of the typical institutional portfolio.” Most institutions typically lease their row crop holdings to commodity farmers to “enjoy predictable cash flows because they are shielded from short-term commodity price and yield swings”, with the trade-off that “income returns from leased row crop land investments are typically lower and less risky.” However, “According to NCREIF, row crop income was just 4.1% in 2013. This was well below the 8% total return expectation that is commonly touted for row crops and which continues to be used to underwrite many row crop acquisitions.” Thus, “Institutional investors…will need to step away from passive “buy-hold-lease” strategies that have characterized the row crop sector for the last two decades.”

This means that just at the time when a demographic tidal-wave of farmland sales are beginning, the primary strategy used by institutional investors — leasing land to chemical-dependent commodity farmers — isn’t going to work. The article suggests that these institutional investors will need to invest more heavily in niche markets and add value.

We agree. Investors can have their farmland both work harder and more sustainably than just passively leasing to commodity farmers. As active farmland managers, Farmland LP determines the highest and best sustainable use of the land, emphasizing livestock and crop rotations. We bring in the best farmers, and create a diverse tenant mix to increase cash flow while decreasing risk. These organic and sustainable farmers benefit from the removal of the burden of land debt, allowing the farmers to scale their businesses to meet their customer demand without the added capital cost of buying and converting land. Although it is more work than just buy-hold-lease, everyone benefits from having a professional farmland manager manage the land, obtain organic certification, make key improvements, and devise a sustainable rotation plan among multiple farmers.

Although institutional investors are only small owners of farmland today, we do see a ray of hope that they will convert into more sustainable agricultural methods. Our REIT is designed to make it easy for investors to own sustainably managed farmland and participate as we demonstrate that sustainable agriculture is superior to chemical-dependent commodity agriculture.