Investing in Farmland: Risks, Rewards and Opportunities
Looking to invest in farmland?
This investment strategy can be a great way to build wealth aside from the usual methods of investing only in stocks and bonds or even residential real estate. That’s because whatever the overall economy is like, people still need food–many investors believe that investing in agriculture like farmland will weather the storms of the economy.
That being said, purchasing hundreds of acres of farmland isn’t exactly accessible to everyone, especially the average investor. You typically need a lot of upfront capital and time commitment to be able to be successful.
The good news is that it’s not always the case. If investing in farmland is of interest to you, here are some ways you can get in on the action.
Purchase Physical Farmland
If you have the time and financial means, you can purchase farmland as an investment. You can find your own, but it might be best to speak with an experienced real estate agent who specializes in helping farmland investors to help you weigh the pros and cons. Things you need to consider are the soil and water quality, the distance between the farm and food processing companies and more.
Another option that doesn’t require you to purchase an entire plot of land is to find syndicated investments. How it works is that companies like American Farm Investors purchase raw farmland and work with local farmers to manage and farm the land. The upfront research and investment into farming projects is done so that all you need to do is to vet their claims of potential risk and return.
The companies then divide the ownership of the farmland across multiple investors–it makes it more affordable for the end user. Instead of spending millions of dollars, investors, similarly to crowd funded real estate investment, may be able to invest in farmland for as little as a few hundred thousands of dollars (though it could be much more). You’ll get income from renting out the land, though returns can vary depending on the syndication.
Known as exchange traded funds, ETFs are a great way for investors who may not have a lot of upfront capital or aren’t interested in putting all their eggs in one basket to gain some diversified exposure to the agricultural sector. There are a lot out there–your brokerage should have a list of the ones offered. That being said, there are still risks with investing in ETFs and management fees can eat into your returns, so do some careful research.
Most ETFs have a combination of a specific type of agricultural commodities such as soy, sugar and wheat. Other ones include cocoa, sugar, grains, coffee and livestock. While you can purchase ETFs that focus on one individual type of commodity, there are also ones that invest in a combination of them.
Sometimes the minimums for syndicated farming deals may still be too high, and that’s ok. If you still want to invest in land, you can put your cash towards a real estate investment trust (REIT) that’s focused on farms.
How these REITs work is very similar to syndicated deals. It’ll typically buy farmland then lease it to farmers earning you returns from the rental income. However, instead of you parking your cash on a single piece of land, REITs spread out your investment over many farms all over a specific area.
The advantage to farm REITs is that you can typically buy shares for a fraction of the price of what you’d normally pay for a syndicated deal. It also offers you more liquidity because you can quickly buy and sell it through your brokerage.
Mutual Funds in the Agriculture and Farming Industries
Mutual funds are similar to ETFs in that they both have a mix of different types of assets and can help you diversify your investments. The main difference is that mutual funds are actively managed–a fund manager is the one who makes decisions on how to allocate the assets within the fund. In contrast, ETFs are usually passively managed and based on a specified market index.
There are no hard and fast rules about whether to pick mutual funds or ETFs–it depends on whether you’re interested in someone helping you pick funds or you want to do it on your own. Either way, there are mutual funds for the agriculture and farming industries.
Depending on the fund, some may invest in commodities (like corn and wheat) or in agricultural-related companies (like companies that sell farming equipment). In some cases, your fund manager may also have assets in the fund that invest outside the agricultural or farming sector. If you want to purely invest in farmland or related fields, then you may not want to go this route.
Just like ETFs, you need to consider past performance and any fees you’ll need to pay. Speak with a finance professional to determine what your potential returns could be, minus fees.
Invest in the Stock Market
Directly investing in the stock market is a lot less passive than some of the other options mentioned above. You also need to do a lot of research like keeping track of the agricultural industry and reading charts. Plus, you’re investing directly in one publicly traded company, so you’re not as diversified as ETFs and mutual funds.
If going this route, pick a brokerage that will support stock trading. Ideally you’ll want to find one that offers intuitive trading tools, plus a comprehensive library of educational resources so you can learn as much as you can before biting the bullet.
What Will You Choose?
If you want to invest in farmland, there are lots of options than just purchasing a farm by yourself. There are syndicated deals if you want physical land, or you can choose from alternatives where you can invest in the farming sector. Choices range from REITs, ETFs and mutual funds that can give you a wider exposure to the agriculture industry.
Whatever option you choose, make sure it’s an investment strategy that works with your goals and risk tolerance. There are also many choices of brokerages to choose from, so do your due diligence and consult with a financial professional if you feel you need to in order to make the right decision for you.