How Profitable is Investing in Farmland?

Hello and welcome to another week of The Alt Investor! This week we’re getting into the weeds of farmland investing…

With increased stock market volatility, many investors are considering alternative assets to decrease volatility in their portfolio. One of the best assets which has received attention for low volatility and returns uncorrelated from the stock market is farmland.

Farmland investment also benefits from rising values and income from crop yields or land leasing. In this newsletter, you’ll learn more about these benefits, whether farmland is profitable, and how to best invest in farmland.

Is Farmland Investing Profitable?

Yes, investing in farmland is profitable, depending on the farmland you invest in and how you utilize the farmland. Based on land value alone, you can expect a return on your investment as farmland has risen in value by 75% in the last 14 years, according to the National Agricultural Statistics Service (NASS) .

Farmland has also historically been considered a less volatile asset compared with the stock market. In addition, it’s not significantly correlated with the stock market - making it an attractive asset for investors seeking alternative assets for their portfolio.

Depending on how you use your farmland, you can earn income from leasing your acreage or selling the crops you farm yourself.

How Do You Make Money From Farmland?

There are three key ways to make money from a farmland investment. As with investing in real estate or stocks, you can make income through methods other than the sale of farmland which has risen in value.

Farmland rising in value

The most obvious way to make money from farmland investing is to buy farmland for less than you later sell it for. As detailed, in the USDA data above, American farmland has increased by 75% in the last 14 years.

By buying farmland and caring for it, you can expect an increase in the value of the land in the future. But there are other ways you can make money from farmland other than by selling it at a later date.

Selling Crops

Another key way to make money from a farmland investment is by selling crops grown on your land. This strategy requires more skill and patience as you’ll need to learn the skills required to farm effectively, grow the right crops, hire farm help, and establish relationships with crop buyers to sell your crop yields.

According to the research of an Iowa State agricultural specialist, returns from crop yields of corn and soybeans experience spikes of profitability mixed with long periods of low or flat profitability.

Earning income from crop yields won’t be a cake walk but is possible with learning the craft of farming effectively. As a farmer, you’ll be subject to the market and externalities which affect how much you’ll earn.

Leasing farmland

The third way to earn income from your farmland investment is by renting farmland to farmers. This strategy will enable you to avoid the weeds of farming yourself while allowing leasing farmers to farm your land.

Leasing farmland can be very profitable and when combined with rising farmland values will enable you to earn income as your farmland rises in value on paper. According to NASS, the average rate to rent cropland in 2022 was $148 per acre.

If you were to rent 50 acres of farmland, you would earn $7,400 a year just from rental income.

How Rising Interest Rates Affect Farmland Value

Rising interest rates by the Federal Reserve have had profound effects on the U.S. economy so far in 2023. In an effort to reduce inflation, rates are in the process of being raised up to 5.25%. This has resulted in high-profile layoffs at major firms like Google and Facebook as access to cheap capital has reduced and the blow up of Silicon Valley Bank but how will it affect other areas of the economy like farmland?

According to the Agricultural Policy Review, a burst of the farmland market is unlikely. Focusing on Iowa farmland, 82% of farmland is fully paid for and not leveraged, making it a safer market without as much pressure from rising rates. Farmland is also considered an attractive investment as an alternative asset compared with stock market volatility.

According to the paper’s writers, farmland values will likely decrease by the end of 2023 but moderate rate increases will not dramatically affect farmland value.

The 3 Best Ways to Invest in Farmland

For investors seeking to make money from farmland, there are three key ways to invest in farmland. Each option has benefits for investors with varying levels of available capital, accredited status, or desire for passive investment.

1. Directly Buying Farmland

The most obvious way to invest in farmland is buying farmland directly. As mentioned, by directly buying farmland you can benefit from rising farmland value over time, crop yields if you want to farm your own land, or income from leasing your land to farmers.

This investment type is best for investors with enough capital to buy farmland directly or the desire to farm themselves. If you want to touch your own land and have enough capital to concentrate your investment in one piece of land, buying farmland is a great option.

2. Farmland REITs

For investors who want less concentration in a single piece of land or who don’t want to actively manage farmland, buying farmland REITs is an excellent option. Farmland REITs can be purchased through your brokerage account and require lower capital allocations.

Farmland REITs deliver increases in price over time if portfolio farmland rises in value as well as attractive dividend yields. Below are two worthwhile REITs to consider buying.

Gladstone Land (LAND)

Gladstone Land is a public farmland REIT which owns land across 15 states in the United States. This REIT offers a dividend yield of 2.36%.

Farmland Partners (FPI)

Farmland Partners is another public REIT which owns land across 18 states whose farms produce 26 different crops. FPI offers a dividend yield of 1.69%.

3. Farmland Crowdfunding

Farmland crowdfunding is a third option for farmland investors who have a minimum of $10,000 to invest and want to own farmland passively. Crowdfunding allows investors to choose a parcel of land and pay a one-time fee to become a shareholder.

Once purchased, shareholders receive regular dividends based on the amount of rent generated by the farm. Shareholders can cash out anytime during the investment term.

An excellent crowdfunding option which Money Armada is partnered with is AcreTrader.

As you’ve learned throughout this newsletter, farmland is profitable and an excellent alternative asset to consider adding to your portfolio. To learn more about farmland investing, consider reading Money Armada’s full guide on how to get started with farmland investing.