Farmland as an alternative investment is a potentially profitable way to diversify your portfolio and minimize risk. Returns on owning farmland, or investing in one of several farming-adjacent sectors, don’t necessarily move with the traditional market. Instead, the land itself can increase in value, you can receive rental or lease payments, own a farm REIT or invest on a crowdfunding platform. So you don’t really have to own a farm, but you could still get a nice windfall from a bountiful harvest. A financial advisor can help you decide if investing in agriculture is a good fit.
Why Invest in Farmland
No matter what the broad market does, we still have to eat. Farmland isn’t recession-proof, but it may offset losses when other financial assets are not doing as well as you would like. The global population is increasing and there will be more and more people to feed. Even though farming may have its challenges, there will always be farming as long as there are people. Farmers and their support industries have to combat events that are out of their control like weather and climate change issues along with geopolitical challenges like a trade war with China.
The issues facing farmers do not mean that it isn’t a profitable industry. Even though returns in the sector sometimes lag, farmland increases in value over the long term and keeps pace with inflation. It adds a real physical asset to your portfolio, which may be full of financial assets, providing diversification. Although returns on current income from farming can be low, capital gains can be high. However, the returns on income, over the long run, are relatively stable. On the flip side, capital gains income may be more volatile, making agricultural investing a long-term venture.
There are a number of ways to invest in farmland, including the options below.
Farming Stocks
You can invest in the equity of any one of several publicly traded firms. There are firms that are directly involved in crop production and others that are the stocks of companies in the farming support industries. Many of the companies involved in actual crop production are privately held. There are a few public ones, like Fresh Del Monte Produce, Inc., that engage in crop production, and Cresud, which engages in the production of agricultural commodities along with other lines of business.
If you are interested in a farming support industry, there are stocks available for companies in processing and distribution like Archer Daniels Midland Co. or in farming equipment like Deere & Co. There are also fertilizer and seed companies.
Farming ETFs and Mutual Funds
There are exchange-traded funds (ETFs) that invest in baskets of agricultural company stocks or agricultural commodities. If you want to invest strictly in farming, these may not be quite what you’re looking for. That’s because some of them have more than half their assets tied up in something other than the agricultural sector. The VanEck Vectors Agribusiness ETF is one of the largest agricultural ETFs and generates conservative, long-term returns.
The same is true of mutual funds. Many have investments in something other than farming, so if you are looking at farming specifically, you might consider another investment. Farm Bureau has a line of agricultural mutual funds and Fidelity Global Commodity Stock Fund, to cite one example, invests in agricultural commodities.
Farming REITs
If you want to actually invest in farmland, a real estate investment trust (REIT) might be the way to go. Instead of buying a farm, you can buy shares of a farm that’s leased to tenants. You can reap the rewards without doing any of the physical work. Each REIT will have exposure to a certain part of the farming sector. In other words, read the prospectus and make sure the REIT is invested in the sector of farmland you want.
Buying shares of a farm REIT may be preferable to buying a farm since they’re traded on the stock exchange and are liquid. Owning a farm is usually not a liquid investment because you have to find a buyer before you can sell it and realize any capital gains. You get periodic dividend payments if the REIT owns land and leases it to farmers. If you want to buy a farm, you may have to raise a lot of upfront capital and there are fees, such as closing costs. Buying a farming REIT only costs as much as one REIT share and the transactions costs are much lower.
There are both debt and equity REITs that investors can consider. Equity REITs own properties, lease them to farmers and collect rent. This income is then distributed as dividends to shareholders. Debt or mortgage REITs provide new financing or buy existing mortgages and earn interest. In this case, the interest income then goes to shareholders. When the mortgages sell, they may also earn capital gains.
Directly Investing in Farmland
You can directly invest in portions of a farm through AcreTrader and FarmTogether, LLC. They are not REITs, but they work in a similar way. You pick out the fields or farms you want to buy and then you purchase shares in the entity that owns it. You share in their profits according to the number of shares you purchased.
The only problem with this approach to owning farmland is that you have to be an accredited investor. Accredited investors include high-net-worth individuals, trusts, banks, insurance companies and brokerages. They have the ability to buy unregistered securities due to their experience and financial knowledge. In order to be an accredited investor, you have to meet the requirements established by the Securities and Exchange Commission and Regulation D.
Since you have to be an accredited investor to directly invest through these companies, this method of buying farmland is not available to the average investor.
Commodities
You can also invest in the products produced by farmland such as soybeans, corn and cattle to name a few. Commodities are risky investments since their price depends on uncertain events that impact their supply and demand. Alternatively, you can invest in commodities funds, which are ETFs that will reduce the risk of investing in the risky commodities market and give you more exposure.
Invesco DB Agricultural Fund is an example of an ETF that invests mostly in agricultural commodities. Take note that if you trade in commodities, it will also complicate your income taxes at the end of the year.
Crowdfunding
For decades, farmers have had trouble raising capital for their farming operations. They have to rely on banks loans, which can be hard to qualify for. Some bank loans have even started to require an evaluation of a farmer’s skills and a character assessment. If the bank loan strategy fails then farmers have to rely on family and friends. For an industry as important as farming, that’s not acceptable.
The Jobs Act of 2012 tried to make it easier for farmers to get financing. Title III of the Jobs Act is the Crowdfund Act which gives companies the opportunity to raise money through crowdfunding and the ability to issue securities. Crowdfunding gives farmers the chance to raise money from a pool of smaller investors.
As a result, these investors can add farming to their portfolios without having to buy a farm. Non-accredited investors are restricted from investing too much and taking too much financial risk. They also receive voting rights for the firms they purchase shares in.
With equity crowdfunding, an investor gets shares of a company in exchange for the money they pledge. All types of farmland companies, from those selling shares of the land to seed companies, can use this. Farmfundr and Harvest Returns are two examples of equity crowdfunding platforms. The focus of these and other crowdfunding platforms can vary. The farmer should work closely with an accountant since they are responsible for seeing their investors get rewards.
Bottom Line
Investing in farmland involves choosing between several possible investment vehicles. Some are only available to accredited investors, but most are available to the average investor.
Farmland hasn’t had overwhelming investment returns down through the years. In some cases, an investment can offset the returns of the broad market through diversification. Farmland and support industries potentially stand to gain from increased demand for healthy and sustainable food. That means farmers have to innovate to meet those challenges.
Tips on Investing
-
Consider working with a financial advisor as you explore making farm-related investments. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
-
Having a plan for your investment portfolio is incredibly important. SmartAsset’s asset allocation calculator can help you choose the investments you want to make.
Photo credit: ©iStock.com/Milan Krasula, ©iStock.com/Jon Bilous, ©iStock.com/TK
The post How to Invest in Farmland (Without Buying a Farm) appeared first on SmartAsset Blog.
