Farmland Etf: A Smart Investment Strategy

Investing in farmland has become an increasingly attractive option for those looking to diversify their portfolios. While the traditional route of buying a farm comes with high upfront costs and requires industry knowledge, new opportunities such as REITs, ETFs, stocks, and crowdfunding platforms have emerged, making it more accessible to the general public.

Farmland offers a unique alternative investment with returns from both rent yields and appreciation in land value, providing gains similar to dividend stocks or other rental properties. With strong historical performance and low volatility, farmland investments can be seen as a hedge against inflation and a stable asset during economic downturns, as people will always need to eat.

For those interested in adding farmland to their portfolio, here are some options to consider:

- Real Estate Investment Trusts (REITs): Farmland REITs, such as Gladstone Land (LAND) and Farmland Partners (FPI), allow investors to benefit from farmland returns without the management headaches. These publicly traded companies own and lease farmland to farmers, providing accessible and relatively low-cost investments.

- Agricultural Stocks: Investing in agriculture companies, such as Archer-Daniels-Midland (ADM), Corteva (CTVA), and Scotts Miracle-Gro (SMG), offers a simple alternative to direct farmland ownership. These companies are involved in crop production, equipment manufacturing, and fertilizer production and distribution, benefiting from both land appreciation and crop yields.

- Farmland Mutual Funds and ETFs: Mutual funds and ETFs, such as the Fidelity Agricultural Productivity Fund (FARMX) and Invesco DB Agriculture Fund (DBA), pool investor money into agricultural activities, providing an easier way to gain exposure to the sector. However, it's important to note that these funds may not exclusively invest in farmland and often include adjacent sectors.

- Crowdfunding Platforms: Farmland crowdfunding platforms, including AcreTrader, FarmTogether, and FarmFundr, enable investors to buy shares in a real farm, significantly lowering the minimum investment. These platforms handle everything from land selection to income distribution, but they usually come with longer holding periods and less diversification compared to other investment options.

Farmland ETFs vs individual stocks

Farmland ETFs vs. Individual Stocks

Overview

When it comes to investing in farmland, there are a few options available such as ETFs, individual stocks, REITs, or direct investment. In this article, we will focus on the differences between investing in Farmland ETFs and individual stocks.

Farmland ETFs

Farmland Exchange-Traded Funds (ETFs) are agricultural-based funds that often follow specific commodities and are based on futures contracts. ETFs are bought and sold on the stock exchange, just like regular stocks. They contain multiple types of investments, from stocks and bonds to commodities, and some are international, while others only hold domestic investments. ETFs have lower expense ratios and fewer commissions than buying individual stocks.

There are two main types of agricultural ETFs: agribusiness ETFs and agricultural commodity ETFs. Agribusiness ETFs invest in the stocks of companies involved in the agriculture supply chain, such as seed and fertilizer manufacturers and farm machinery producers. Agricultural commodity ETFs invest directly or indirectly in agricultural commodities such as corn, soybeans, and wheat.

Some popular farmland ETFs include:

• Invesco DB Agriculture Fund (DBA)
• IShares MSCI Global Agriculture Producers ETF (VEGI)
• VanEck Agribusiness ETF (MOO)

Individual Stocks

Investing in individual agricultural stocks means you are buying shares of a specific company involved in the agriculture industry. This could include food producers, chemical companies that make fertilizers and insecticides, biotechnology firms, equipment manufacturers, and more.

Some popular individual agricultural stocks include:

• Corteva Inc. (CTVA)
• Archer-Daniels-Midland Co. (ADM)
• Tractor Supply Co. (TSCO)

Comparison

Both options provide exposure to the agriculture industry, but there are some key differences to consider.

Farmland ETFs offer instant diversification, as they invest in a range of companies or commodities, reducing the risk associated with investing in a single company. ETFs are also more liquid, meaning they can be easily bought and sold on the stock exchange.

Individual stocks, on the other hand, offer the potential for higher returns if the company performs well. Investing in individual stocks also allows you to have more direct control over your investment and the specific companies you choose to support.

However, investing in individual stocks comes with higher risk, as your investment is tied to the performance of a single company. It also requires more research and active management to select the right companies to invest in and monitor their performance.

The decision between investing in Farmland ETFs or individual stocks depends on your investment goals, risk tolerance, and experience level. ETFs are generally more suitable for investors seeking broad exposure to the agriculture industry and wanting instant diversification, while individual stocks may be more suitable for those seeking higher potential returns and willing to take on more risk.

REITs

Investing in Farmland REITs

Real estate investment trusts (REITs) are a great way to invest in farmland. REITs enable anyone to invest in farmland, which has historically been an excellent asset class. By law, 90% of taxable profits must be returned to shareholders via dividends.

Farmland REITs diversify portfolios, offering uncorrelated returns and a strong hedge against inflation. They provide accessible exposure to attractive returns, combining rental income and appreciation, enhancing portfolio diversity.

There are two main types of farmland REITs:

• Providing capital to farmers: Farmland REITs commonly complete sales-leaseback transactions with farmers by acquiring land and other agricultural real estate and then leasing it back to the farmer under a long-term lease.
• Providing investors with access to farmland: Historically, only wealthy individuals could invest in farmland due to the high cost and operational expertise required. REITs enable anyone to invest in farmland.

Advantages of Investing in Farmland REITs

• Portfolio diversification: Farmland offers investors uncorrelated returns compared to other major asset classes such as stocks, bonds, and cryptocurrencies, reducing the overall volatility of a portfolio.
• Inflation hedge: Farmland has generally offered a better hedge against inflation than stocks, bonds, and gold. Historically, there has been about a 70% correlation between the value of US farmland and the consumer price index.
• Attractive total returns: Farmland provides investors with two sources of returns: rental income and capital appreciation. The two sources delivered a combined average annual return of 11% from 1992 to 2021.

Risks of Investing in Farmland REITs

• Interest rate risk: Rising interest rates make it more expensive for REITs to borrow money, affecting their ability to make acquisitions.
• Natural disasters: Droughts, wildfires, insect infestations, and other natural disasters can affect a farm's harvest and ability to pay rent.
• Crop prices: Crop prices can be very volatile, especially for annual commodity crops such as corn, soybeans, and wheat, impacting farm income.
• Farmer-tenants: Farming has been a challenging business due to natural disasters, crop prices, equipment costs, labour costs, debt, and other issues. If farmers run into financial trouble, they might not be able to make their rental payments.

Examples of Farmland REITs

• Gladstone Land Corp. (NASDAQ: LAND): Focuses on fruit and vegetable cropland and has a market cap of nearly $600 million.
• Farmland Partners Inc. (NYSE: FPI): Focuses on farms producing commodities like wheat, soybeans, corn, and rice and has a similar market cap to Gladstone Land.

Tips for Investing in Farmland REITs

• Review financial performance: Analyze the REIT's revenue, income, and ability to acquire new farms.
• Consider analyst ratings: Keep an eye on favourable analyst ratings and price targets.
• Monitor insider purchases: Large purchases by company directors and executives may indicate a positive outlook for the stock.
• Evaluate dividend sustainability: Ensure that the REIT can maintain its dividend payments without relying solely on cash reserves.
• Understand risks: Be aware of the specific risks associated with farmland REITs, such as interest rate risk, natural disasters, crop prices, and farmer-tenant stability.
• Diversify your portfolio: Consider investing in multiple farmland REITs or other types of REITs to spread your risk.
• Long-term outlook: Investing in farmland REITs is typically a long-term strategy, so be prepared to hold your investment for several years.

Direct ownership

There are ways to get started with less capital, however. You could find a farm or pasture at a lower price point, or you could look at crowdfunding platforms, which allow you to buy a small slice of a real farm. For example, on AcreTrader, investments tend to start with a minimum of $15,000-$40,000.

Another option is to buy an existing farm with a sale-leaseback transaction, where the current farmer continues to work the farm and pay rent to you as the new owner. This is likely to be the least risky and most passive way of investing directly in farmland, but you may need to pay a higher price for the land and therefore earn a lower cash yield.

If you want to be more hands-on, you could buy an existing farm or agricultural land and lease it to a new tenant. This could be more work upfront as you would need to find the right tenant for the farm, but it could also generate a higher return.

Another option is to acquire land that is not currently used for agriculture and convert it for farming. This could be the most profitable option as you would likely be able to purchase the land at a lower price, but it would also require the most work. You would need to transform the land for farming and find the right crops and tenants for the location.

Crowdfunding platforms

Investing in Farmland ETFs: Crowdfunding Platforms

Steward

Steward is a crowdfunding platform that focuses on investing in sustainable farms. It provides farmers with capital in the form of loans to sustain and expand their farms. Its initial offering, Steward Farm Trust, is open to all investors with a low minimum investment of $100.

Harvest Returns

Harvest Returns is a crowdfunding platform offering a range of agricultural deals, mostly open to accredited investors. It provides opportunities in equity and debt, but the minimum investment is $10,000.

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, with a minimum investment of $10,000. FarmFundr manages all aspects of the farmland, from planting to harvesting to selling, while investors monitor their farm's progress online.

FarmTogether

FarmTogether is an online marketplace for investing in pre-vetted U.S. farmland. It provides accredited investors with direct access to specific farms or a fund holding several farm investments.

Farmland LP

Farmland LP focuses on buying commodity farmland and converting it into organic farmland. It offers accredited investors the opportunity to participate in a private equity fund, with the potential to become a REIT and go public.

AcreTrader

AcreTrader is a crowdfunding platform that provides accredited investors with direct access to farmland. Most offerings require the purchase of 10 shares, equivalent to one acre of land costing between $3,000 and $10,000. Investors own shares in an LLC that holds the legal title to the land.

Mutual funds

One example of a mutual fund with exposure to agricultural firms or commodities is the Fidelity Global Commodity Stock Fund (FFGCX). This fund has a broad range of holdings, including companies that produce crops, as well as those in supporting industries such as equipment manufacturing and crop distribution.

It's important to note that many mutual funds in this sector have exposure to other sectors in addition to agriculture. So, if you are specifically looking to invest in farmland, be sure to research the fund's holdings and ensure they align with your investment goals.

Additionally, mutual funds can come with high fees, so be sure to compare fees across different funds and consider the potential impact on your returns.

For investors who want a more hands-on approach, another option is to invest in farmland directly by purchasing usable cropland or pastureland and renting it out to farmers or ranchers. However, this method typically requires a sizable upfront investment.

Frequently asked questions