Every year farmland is lost to urbanization. According to American Farmland Trust, a nonprofit that works to save farmland from development, the U.S. loses 40 acres of farmland every hour, with 37 percent of America’s developed land having been converted in the last three decades. In 2015, a little more than 2 million farms were left in the U.S. according to the USDA.
For those who own it, it’s called “gold with a coupon” since farmland pays rental income to investors who are collecting from farmers while generating capital appreciation that can be used to hedge against inflation.
“It’s below people’s radar screen,” says Eric O’Brien, co-founder and managing director at Fall Line Capital in San Mateo, California, a private equity firm specializing in acquiring and developing U.S. farmland. “With equity markets as robust as they have been there hasn’t been as much emphasis on a real asset like this.”
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Unlike real estate, which is tied to a local economy, some investors are using farmland to diversify their portfolios because returns tend to be immune to stock or bond fluctuations.
“It does have a fairly high cash yield compared to other asset classes with similar risks,” says Greyson Colvin, managing partner and founder of Colvin & Co., an agriculture-focused investment manager in New York. “For institutional investors, this is a great alternative to treasury and corporate bonds.”
But farmland is difficult to access. It’s privately owned in patchwork pieces across the U.S., much of which is sold at local auctions.
“There’s no way to access the best tracts unless you’ve got real expertise,” O’Brien says. “We pass on 90 percent of the deals we see for physical or economic reasons. It’s a difficult asset to get your arms around.”
O’Brien also believes much like the forest and timber industry, which flipped from nearly 100 percent privately owned to more institutional and public-investor owned, the next decade will see a dramatic increase in institutional and general investors trying to capitalize on the shrinking amount of farmland.
Hunt Stookey, director of research and investment strategy for Ceres Partners, headquartered in South Bend, Indiana, runs a $500 million private farmland fund that includes 260 farms and 90,000 acres across 10 states.
Despite commodities prices dropping 50 percent in 2012, Stookey says farmland prices were previously undervalued and now soft, down by 5 to 10 percent in the current market, but not in the dire position some experts have portrayed. He says the market will continue to stay this way until commodity prices recover.
“We think farmland makes a solid investment, historically, because it’s has a strong capital appreciation typically of 5 to 7 percent per year over a long period of time, and it provides a strong income of 4 to 6 percent,” Stookey says.
As commodity and land prices have come down, O’Brien says many farmers that are in financial trouble are trying to sell to institutional investors, while those who can hold off are waiting until market prices return.
What makes investing in farmland difficult is the inability to purchase it on an index, Stookey says. “There’s no market price on any given day, so it’s hard to say what a piece farmland is really worth,” he says.
Prepare to hold. Anyone who invests in farmland should recognize that this is a long-term investment. Experts say many farmland investors fall into two categories — those who want to sell after a decade or so and those who look at this an intergenerational investment that can be inherited.
“To [our investors] this is the family silver,” Stookey says. “One investor told me, ‘This is for my grandchildren, this is not a hot stock that’s going to make me money in six months.'”
[See: The 25 Best Blue-Chip Stocks to Buy for 2017.]
What else to consider. It’s important to understand the difference between annual row crops like corn, soybeans and wheat, and permanent crops such as almonds, peaches and grapes — anything grown in a vineyard or orchard.
“They have completely different investment risk and return characteristics,” Stookey says, citing the larger consistent global demand for row crops that contrasts the popularity boom-and-bust cycles many permanent crops face.
Investors should consider the geography of the farmland to determine where their investment sits on the global supply curve, Stookey says. “We invest in the U.S. because we are the low-cost producers, and in the Midwest because that is the low-cost region within the U.S.,” he says.
Farming should be measured over cycles of 5 to 10 years and not over one crop. Colvin says his grandfather told him in a five-year period there will be one disaster crop, three adequate crops and one bumper crop that would sustain a farmer for that period.
Potential investing avenues. For many everyday investors, using private vehicles with expensive minimums can be out of reach. For example, Stookey says Ceres Partners, which launched in December 2007, requires individual investors to invest a minimum of $250,000.
Kevin Egolf, CFO of Iroquois Valley Farms, which is headquartered in Evanston, Illinois, says its 250-member limited liability company opted to convert into the first organic family farm real estate investment trust in the U.S. starting Jan. 1. He says the privately-held Iroquois Valley Farmland REIT public benefit corporation will include 32 farms across 4,500 acres in Michigan, Maine, New York, Kentucky, Illinois and Indiana and likely have a buy-in of $25,000.
Egolf says the REIT will be open to accredited investors and eventually open up to non-accredited investors. “One of our goals is to be broadly held by a wider segment of the population, and not just held by ultra-high net worth investors,” Egolf says.
Other investing avenues include Gladstone Land Corp. (ticker: LAND) which has 57 farms, 33,997 acres in seven states in its $386 million public REIT.
Farmland Partners ( FPI) expects to acquire American Farmland Co. ( AFCO) in the coming weeks and then will hold — after the transaction — $850 million of farmland, a mix of 75 percent row crops and 25 percent permanent and specialty crops, across 133,000 acres in 16 states.
Paul Pittman, CEO of Denver-based Farmland Partners, says staying small isn’t an option for a public company and that’s why FPI held a $11-per-share public offering in July 2015 to help scale the company prior to a $197 million, 22,100-acre deal for 118 Illinois farms that closed in March. “We’ve got to grow this company, even if we don’t like the stock price,” says Pittman, whose company held another public offering at $11.25 per share in November. The stock now trades at about $11.20.
[See: The 10 Best REIT ETFs on the Market.]
Pittman says regardless of how low the stock price is now, the REIT will do well since “in the long term, the need for global food production and food demand overall is going to go up.”
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How to Invest in Farmland originally appeared on usnews.com
