The Ultimate Guide To Buying A Farm: An Investment Seminar

Investing in farmland is an attractive prospect for many, but the high upfront cost of buying a farm has historically made this opportunity inaccessible to most. However, new investment opportunities are reducing these barriers to entry, and now all you need to invest in farmland is some extra cash and an investment account.

This seminar will outline the various ways in which you can invest in farmland, from the more traditional route of buying land directly, to the more modern methods of crowdfunding and investing in agricultural stocks, ETFs, and REITs. We will also discuss the pros and cons of each method, and how to make the right investment choices for your goals and risk tolerance.

• Historical performance and returns of farmland investments
• Comparison to traditional asset classes (e.g., stocks, bonds, real estate)
• Different ways to invest in farmland: REITs, agricultural stocks, ETFs, mutual funds, crowdfunding platforms, direct land ownership | | Benefits of Farmland Investing | - Diversification from traditional assets
• Inflation hedge due to correlation with CPI
• Potential for capital appreciation and rental income
• Recessed-resistant asset due to essential nature of agriculture | | Risks of Farmland Investing | - High upfront cost and large capital commitment
• Volatility in commodity prices impacting farm profits
• Weather risks affecting crops and land |

Farmland as an alternative investment

Farmland is a unique asset that provides a form of portfolio diversity disconnected from traditional asset classes like stocks, bonds and real estate. It is a tangible alternative asset that has created wealth opportunities for generations.

Farmland produces returns through rent yields and appreciation of the land's value. These investments can work similarly to dividend stocks, with gains from income and capital gains.

This combination of appreciation and rent yields has led to consistently strong performance. For example, in the 20 years to 2020, US farmland produced average returns of 12.2%, compared to the average annual return of 10% for the Standard & Poor's 500 index.

Farmland investments can also act as a hedge against inflation. As the world's population increases, farming will play an increasingly important role in sustaining global societies. This means that interest in agriculture production as an investment will continue to grow.

How to invest in farmland

There are several ways to invest in farmland, and the best choice depends on your situation.

Owning land directly

You can buy land outright and rent it to a farmer for their crops or livestock. However, the capital needed to buy a farm can be significant. For example, according to the USDA, the average farm size in 2021 was 445 acres, with an average cost of $3,800 per acre in 2022.

Real Estate Investment Trusts (REITs)

REITs are a popular way to enjoy the benefits of real estate investing without the management headaches. They make diversification easier and are much more liquid, with a lower minimum investment.

There are currently two farmland REITs in the US: Gladstone Land Corporation (LAND) and Farmland Partners (FPI).

Agricultural stocks

Instead of buying farmland, you can buy shares in companies in the agriculture industry, such as crop production, agricultural equipment manufacturing, or fertilizer production and distribution.

Farmland mutual funds and ETFs

You can buy stocks in individual agricultural companies, or invest in a mutual fund or exchange-traded fund (ETF). However, it is important to note that farmland mutual funds don't always invest exclusively in agriculture and often invest in adjacent sectors.

Crowdfunding platforms

Farmland crowdfunding platforms allow you to buy a small slice of a real farm, significantly lowering the minimum investment. Examples include AcreTrader, FarmTogether and Farmfundr. However, the holding period is usually at least three to five years, and you may get less diversification than with other investments.

Real Estate Investment Trusts (REITs)

• Return a minimum of 90% of taxable income as shareholder dividends each year
• Invest at least 75% of total assets in real estate or cash
• Receive at least 75% of gross income from real estate-related sources
• Have a minimum of 100 shareholders after the first year of existence
• Have no more than 50% of shares held by five or fewer individuals during the last half of the taxable year

By adhering to these rules, REITs don’t have to pay tax at the corporate level, which allows them to finance real estate more cheaply and earn more profits to disburse to investors than non-REIT companies.

There are several types of REITs:

• Publicly traded REITs: These are traded on major stock exchanges such as the New York Stock Exchange (NYSE) and the Nasdaq Exchange. Anyone with a brokerage account can invest in a publicly traded REIT.
• Public non-traded REITs: These are also open to all investors but are not traded on stock exchanges. Investors can purchase them through a financial advisor or on online portals sometimes known as real estate crowdfunding platforms.
• Private non-traded REITs: These are not available to the public and are usually only open to high-income earners or high-net-worth individuals.

Within these types are three subcategories by asset type:

• Equity REITs: These own and operate income-producing real estate such as apartments, office buildings, and warehouses.
• Mortgage REITs: These provide financing for real estate by purchasing or originating mortgages and mortgage-backed securities and earning fixed income from the interest.
• Hybrid REITs: These invest in a combination of income-producing real estate and real estate-backed loans.

REITs offer several benefits, including:

• Passive income through high dividends
• Tax advantages
• Diversification from the stock market
• Attractive total return potential
• Greater liquidity compared to owning real estate outright
• Transparency through audited financial statements

However, there are also some drawbacks to investing in REITs, including:

• Higher tax liabilities due to nonqualified dividends
• Sensitivity to changes in interest rates
• Property-specific risks such as tenant move-outs and industry headwinds
• The risks of using too much debt

Agricultural stocks

Benefits of Agricultural Stocks:

Examples of Agricultural Stocks:

Some widely held agricultural stocks include:

• Archer-Daniels-Midland (ADM): A global agricultural giant involved in processing and trading food ingredients, animal feeds, and biofuels.
• Corteva (CTVA): A company focused on crop protection products, seed products, and digital tools and services for agriculture.
• Scotts Miracle-Gro (SMG): A leader in lawn care products, fertilizers, and hydroponics, catering to individual consumers and farmers.
• Nutrien: One of the world's largest fertilizer producers, offering potash, nitrogen, and phosphate fertilizers.
• Bayer: A diversified company with a strong presence in the agricultural sector, known for its popular weed-killer Roundup.
• Sumitomo Chemical India Limited (SCIL): An Indian company manufacturing and marketing products for crop protection, pest control, and animal feed.

Factors to Consider:

When investing in agricultural stocks, it is important to consider the following factors:

• Supply Chain Resilience: Assess the company's ability to withstand disruptions in the complex supply chains involved in production, distribution, and transportation.
• Technology Integration: Successful agricultural companies leverage technology, innovative practices, precision farming, and digital solutions to enhance productivity and efficiency.
• Regulatory Environment: Stay informed about government policies, subsidies, and regulations that can impact crop pricing, fertilizers, and subsidies, as these can affect a company's profitability.
• Market Trends: Keep updated with global and domestic trends, policy changes, market dynamics, and international trade that may influence the performance of your agricultural stocks.
• Financial Health: Analyze the financial stability and growth potential of agricultural companies by evaluating factors such as revenue growth, profitability, debt levels, and cash flow.

Farmland mutual funds and ETFs

Farmland ETFs

An ETF, or Exchange-Traded Fund, is a collection of multiple assets in a single fund that can be traded on the stock market. Farmland ETFs hold only agricultural stocks, such as shares in grain, livestock, and sugar companies.

• Invesco DB Agriculture Fund (DBA): This ETF invests in several natural agricultural resources, providing investors with easy access to commodity futures. It has a year-to-date return of 1.64% and an expense ratio of 0.85%.
• Teucrium Agriculture Fund (TAGS): This ETF offers exposure to four separate Teucrium commodity funds related to crop production: corn, soybean, wheat, and sugar. It has an expense ratio of 0.13%.
• VanEck Agribusiness ETF (MOO): This ETF offers exposure to equities involved in the agricultural sector, with holdings in developed regions and emerging markets such as Brazil, Malaysia, and Singapore. It has an expense ratio of 0.52%.
• IShares MSCI Global Agriculture Producers ETF (VEGI): This ETF includes equity securities of companies in the agricultural sector in both developed and emerging regions. It invests in fertilizers, agricultural chemicals, and farm machinery. It has an expense ratio of 0.39% and assets of $321.7 million.

Farmland Mutual Funds

Farmland mutual funds pool investor money into activities that support the agriculture industry. It is important to note that farmland mutual funds don't always invest exclusively in agriculture and often invest in adjacent sectors. One example of a farmland mutual fund is the Fidelity Agricultural Productivity Fund (FARMX), which aims to invest 80% of its assets in agricultural productivity companies.

When investing in farmland mutual funds and ETFs, it is important to consider the fees and expenses associated with the fund, as well as the level of risk involved. Additionally, it is worth noting that dividend yields for these funds can be quite low compared to other investments.

Farmland crowdfunding platforms

Crowdfunding platforms have emerged in recent years, allowing investors to enter the farmland game. These companies typically buy a piece of agricultural property on behalf of investors, who can then own a small piece of a project. While the platforms promise to make investing easy by screening properties and negotiating the deal, investors will have to put in work to diversify. The platforms' investments are usually limited to one property growing one type of crop, so investors looking for geographic diversification and exposure to a variety of agricultural products will need to invest in multiple deals.

AcreTrader

AcreTrader is a real estate crowdfunding platform that connects investors and farmers, giving the former a way to play farm properties and the latter access to capital to operate their farms. The company buys about 1% of the farm properties it reviews each year. AcreTrader advertises individual farms for sale, with a recent offering being a 126-acre farm in Illinois listed for $1.19 million, or $9,440 per acre. The minimum investment was $9,440, and investors were told to expect an 8.2% annual return. AcreTrader charges a management fee of 0.75%.

FarmFundr

FarmFundr is a farmer-owned, equity crowdfunding platform focused on specialty crop operations in the United States. It offers fractional farmland ownership opportunities to its members. The platform requires that investors be accredited, and the minimum investment ranges from $10,000 to $100,000, depending on the property. FarmFundr says it takes a more active role in the management of the farms it markets to investors and pays investors after each year's crop is harvested.

FarmTogether

FarmTogether is a real estate crowdfunding platform that specializes in farmland. The site requires you to be an accredited investor. FarmTogether investors receive shares of limited liability companies that own the underlying farmland. This approach gives investors exposure to small slices of independent farms. You can add geographic diversification by buying shares in farms located across the country.

Farmland LP

Farmland LP is a real estate investment trust with more than $175 million in assets. The company focuses on sustainability and organic farming, generating returns by converting conventional farmland to sustainable. Farmland LP is seeking minimum investments of $50,000 from accredited investors, targeting returns of 11% and charging a management fee of 1.75%.

Harvest Returns

Harvest Returns is a crowdfunding platform that focuses on farmland and indoor growing operations. The company has raised funds for a cocoa farm in Ghana and a hydroponic produce company in Texas. Harvest Returns directly manages its investments and supports small, local farmers who are looking for capital to expand their farm operations. Harvest Returns allows several non-accredited investors to invest in many deals on their site. With minimum investments as low as $10,000, this platform is more accessible to smaller investors.

Steward

Steward is a crowdfunding platform that invests in smaller deals, with a heavy emphasis on sustainability. Recent deals on the site include $148,000 for a grass-fed beef ranch in Louisiana and $102,000 for a bison farm and agricultural tourism operation in West Virginia. Steward does not invest in farmland equity, making it a safer investment for customers. It also allows investors to get started with stakes as small as $100.

Frequently asked questions