When you think of owning a farm, you may think of backbreaking work to harvest crops and early morning calls to milk the cows. But perhaps you should think of farmland differently.
After all, it’s possible to own farmland and profit without doing the actual work of raising crops and livestock. In fact, you can invest in farmland without ever setting foot on the property, just as you would invest in any other business.
Farmland and agriculture can diversify any investment lineup and may help smooth out risk, as returns are often not correlated with other parts of the markets.
There are many ways of investing in farmland and agriculture. Will you consider adding some farm investments to your portfolio?
Table of Contents
- Potential of Farmland
- Mutual Funds and ETFs
- Investing in Farm Debt
- Pros and Cons
Potential of Farmland
There were more than 2 million active farms in the United States in 2018. That represents nearly 900 million acres of farmland, according to the U.S. Department of Agriculture.
This farmland is used for a wide range of agricultural purposes, and all of it produces revenue. (To be officially labeled as a “farm,” you must produce at least $1,000 in sales of agricultural products in a year.)
In 2018, there were about 150,000 farms that earned more than $500,000 in revenue. Needless to say, farming is a big business and represents a big investment opportunity.
In addition to owning and operating a farm yourself, you can purchase shares of a farm, or place bets on the prices of livestock and crops.
There’s also plenty of money to be had by investing in the companies that help farms operate. Let’s examine some of the ways you can invest in farmland.
Many farms, particularly the largest ones, are owned by corporations, and some of these are publicly traded. You can purchase shares of stock in a wide range of companies involved in farming.
These companies include producers of crops, manufacturers of seeds, or companies involved in transporting and distributing the items that farms produce.
Here’s a look at some types of publicly traded companies involved in agriculture.
These are the companies that own or lease farms and produce the crops and livestock that feed the world. Major publicly traded firms in this space include Adecoagro S.A. [NYSE: AGRO] and Fresh Del Monte Produce [NYSE: FDP].
Some of the greatest innovations in farming have come from companies that have developed seeds designed to withstand drought and other harsh conditions and to produce high crop yields.
These companies include Monsanto [NYSE: MON]; BASF [OTCMKTS: BASFY] Dow [NYSE: DOW]; and DuPont [NYSE: DD]. Many of these companies are massive conglomerates with business units unrelated to agriculture.
Some of the largest agricultural companies are involved in the fertilizer business and boast billions of dollars in revenue. They include ScottsMiracleGro [NYSE: SMG], Terra Nitrogen Company [NYSE: TNH] and Nutrien [NYSE: NTR].
It takes tractors and a lot more to do the work of managing a farm. So it’s worth exploring the companies that make the heavy equipment.
A considerable amount of consolidation of this industry has happened over the years. Currently, three companies produce most farm equipment: Deere and Company [NYSE: DE], CNH Industrial [NYSE: CNHI], and Agco [NYSE: Agco].
Distributors and Processors
There is a lot that happens between when a farmer produces crops and when food ends up on your table. Many companies process what farms produce and then get it to market in the products that Americans consume.
These companies include Archer Daniels Midland [NYSE: ADM], which operates the world’s largest crop transportation network, and Tyson Foods [NYSE: TSN], a major processor of chicken, beef, and pork.
Did you know it’s possible to invest in soybeans? How about lean hogs and live cattle? Or corn, wheat and coffee? You can invest in these items as commodities, and essentially place bets on their price in the marketplace.
Commodities are traded heavily on Mercantile Exchanges in New York and Chicago, both owned by CME Group. If you are intimidated or confused by commodities trading, you can also invest in funds that reduce your risk and give you exposure to the broad commodities market.
Mutual Funds and ETFs
Not sure how to select individual stocks related to farming? Then consider a mutual fund or exchange-traded fund that focuses on the farming sector. This can give you access to a broad swath of companies involved in farming, but free you from researching each company.
Examples include the Invesco DB Agriculture Fund [NYSE Arca: DBA], which invests primarily in agriculture futures, and the iShares Global Agriculture Index ETF [NYSE: COW]. There are also dedicated ETFs and funds for the commodities markets.
It’s easy to examine the individual holdings of a fund or ETF to see what it invests in. The iShares ETF, for example, invests about 9% of the money into Tyson Foods, and another 8% in Deere and Company. Archer Daniels Midland and ScottsMiracleGro are also part of the investment lineup.
Real Estate Investment Trusts are companies that collect money from portfolios of real estate. And there are REITs related to farming that you can invest in. These securities often provide high dividend income because they are forced by law to return profits to shareholders in exchange for avoiding corporate taxation.
Gladstone Land Corporation [NASDAQ: LAND] was the first farming REIT, specializing in buying land and leasing it to farmers. As of 2019, it owned 90 farms and 75,000 acres.
Farmland Partners [NYSE: FPI] is the nation’s largest farm REIT with about 162,000 acres and 125 tenants.
Even investing in farmland has an online platform. AcreTrader allows an individual to select a piece of farmland and purchase shares in the entity that owns it. Shares are equivalent to about 1/10 of an acre.
The AcreTrader platform handles all administration and management. It collects and disburses excess revenue from the farms, and you can sell your shares at any time, just like stocks. Advertised as a great opportunity for passive income, AcreTrader claims that you can get a 3-5% annual yield from lower-risk properties.
AcreTrader makes available only about 5% of the properties it reviews and provides photos and details of the location and crops grown at the farm. Also, for informational purposes on all properties, AcreTrader provides a rating based on risk.
Minimum investments with AcreTrader are high. When we reviewed the site, all properties required a minimum of $4 million. AcreTrader also notes that while you can earn an income from the investment, selling shares can be difficult due to the illiquid nature of farmland.
Investors are expected to hold onto their shares until the underlying property is sold. A typical “hold” period, according to AcreTrader, is between 5 and 20 years. So it’s important to think of the investment with a long-term view in mind.
Investing in Farm Debt
In addition to purchasing equity in farms, you can also be a lender to them. Farm debt hit $409.5 billion in 2018. According to the USDA’s Farm Sector Income Forecast, 10% of that debt is owed by individuals.
Farmers borrow money frequently because they are in a capital-intensive business. They may need short-term loans to finance planting. Plus, they may get long term loans to finance the purchase of equipment. And in many cases, they will also have mortgages on their land.
If you purchase farm debt, either directly or through bonds, you’ll receive consistent payments as the borrower pays back the loans. You will be free from worrying about the inconsistent nature of cash flow from actual farm revenues.
Of course, when you buy debt, there is always the risk that the borrower will default. However, find a farm that can pay its bills, and you may find a good investment opportunity.
Pros and Cons
There are many reasons to believe that investing in farming and agriculture-related businesses could be profitable. But like any investment sector, there are risks along with rewards. Here are some things to consider before “farming up” your investment portfolio.
Pro: People Need to Eat
The farming sector is not going away. As long as there are people on Earth, there will be farms. Given that our global population is only growing, one could argue that it’s an industry you can bet on for the long term.
Pro: Farms Are Increasingly Productive
An acre of farmland today produces significantly more crops, on average, than one from 20 years ago. So, if you are considering buying land for farming, that should make you happy. You might not need to buy as much property as you might have in the past.
Thanks to advancements in science and technology, farms can produce higher yields with less land and other resources. The USDA notes that even as total farmland and labor decreased, the total output from farms doubled between 1970 and 2015.
Con: Returns Have Been Underwhelming
The farming and agriculture industry is wide and broad, but it’s hard to argue that it’s been a major driver of investor returns in recent years. U.S. net farm income is expected to rise slightly in 2019, to $88 billion. But that’s about 28% lower than its peak of $123 billion in 2013.
The average cash net income per farm in 2019 is projected to be $81,000, which would represent the first increase in four years. The median household income of farmers in 2019 is forecast to reach $74,768, which is $7,000 less than four years ago. The USDA notes that most income from farmers is actually from off-farm activities.
For those investing in commodities and farm stocks, consider that the S&P GSCI Agriculture Index has reported an average annual loss of 5% in the last ten years, and nearly 11% loss over the previous five years.
Con: You Are at the Mercy of the Weather and Climate
In farming, there are many factors beyond your control, most notably whether or not conditions are right for crops to grow. Plants need an appropriate amount of rain and sunshine, and too much or too little of each can affect crop yields.
Over the years, U.S. farmers have dealt with droughts in California, flooding in the Midwest, hurricanes in the Southeast, and heat waves everywhere. Moreover, climate change has the potential to impact farming worldwide.
“Overall, climate change could make it more difficult to grow crops, raise animals, and catch fish in the same ways and same places as we have done in the past,” the Environmental Protection Agency says.
Con: Trade Wars Present Uncertainty
It’s bad enough that you can’t control the weather. You also can’t control the decisions of the government, which have an impact on what you can earn. One of the biggest challenges currently facing farmers is the trade war between the U.S. and China that has resulted in fewer imports of U.S. crops.
The Chinese announced that they would stop importing U.S. agricultural products, an apparent retaliation to tariffs that the U.S. imposed on Chinese goods. China’s announcement comes after imports were already down 50% between 2017 and 2018.
“China’s announcement that it will not buy any agricultural products from the United States is a body blow to thousands of farmers and ranchers who are already struggling to get by,” American Farm Bureau President Zippy Duvall said.
Where would we be without farming? As the world population has exploded, farming has become as essential as ever. And that means there’s an opportunity for investors who want to diversify their portfolios.
With more than 2 million active farms in the U.S. alone, the potential for revenue from farming is in place. But it’s a challenging industry, with volatile commodities prices, unpredictable climates, and geopolitical uncertainty, all creating headwinds.
If you want to invest in farmland but aren’t interested in owning and operating a farm, there are many opportunities for you. The purchase of farm equities, REITs, and debt offer direct income streams.
Trading commodities like livestock and grain can be lucrative, for those who understand the industry. There are even new online platforms that allow you to purchase shares of actual farms directly.
The investor returns on farmland and agriculture and farmland aren’t as high as some other industries and sectors. But farmland can add different sources of return to your investment portfolio and help you spread out risk.
Have you ever considered investing in farmland? Tell us about your experience in the comments below.