Should You Invest in Farmland?
It was an ideal childhood growing up on a farm with gorgeous sunsets. The closest neighbors were more than a mile away, and we never locked our house door and left the keys in the trucks in case a neighbor or someone ever needed a vehicle. We all grew up talking about crop prices, weather, and tractors. Though, it wasn’t until I sat down to write about farmland investing that it became apparent how much I had learned by being immersed in the industry, and that there is much to be learned before making a wise farmland investment.
Both sets of my grandparents were farmers and ranchers. Many of my cousins, aunts, and uncles still farm, and I grew up farming. My parents have moved to the “big city” of 4000 people, but they still own some farmland as investments, and they, as well as other family members, have purchased more farmland as investments.
While there is still some mystique to owning farmland for some people (kind of like owning a restaurant, which I’ve also done and will never do again), it’s much more difficult than it appears. The benefits, too, aren’t overly impressive; but for a slim majority of you as alternative investors, it could be a fit.
Using my own experience and interviewing a couple of other farmland investors, consensus is that you can make about 3-4% per year in cash flow on average. There will be some years when commodity prices are high and the weather is great and you’ll do better; there will also be years when you get hailed out, or there’s a drought, and your insurance money will break you even and then some. Most years will middle along.
Sometimes you can use the investment as a tax write off. When the land is paid off, you can borrow against it if you need, and it could be a nice mix to a portfolio. And, like with most investments, if you can get an amazing bargain, you can get an equity appreciation that looks nice on a balance sheet. And, of course, there are the intangible benefits – owning an asset where you can have a place “out of the city” that is all yours – a place you can go if things go really bad – and a place where you can grow your own food, if need be.
How does it work?
I must first make a caveat that each county, and even part of a county will vary in its value, weather pattern, and crop yield. Just as you get to know a town or city and a few blocks away can have a very different feel; the same is true with farmland. So, you’ll need to do a fair share of due diligence before buying.
That said, the biggest difference in farmland value, yield, and use is if it’s irrigated or not. Irrigated land can usually have crops on it ever year. Dryland may not be able to have crops every year – it may need to set “fallow” every other year, or sometimes every 1/3rd year to build up enough sub-moisture for crops to be useful.
Then, after doing diligence (more on that later), an investor will buy a certain acreage of farmland. They’ll find a local farmer (operator) to farm it for them, and the farmer will keep a portion of the annual profit. This number ranges county to county across the country. Some usual rates are for the farmer to keep 60-66% of the profit. Local customs on costs vary as well. One investor has the operator pay for all expenses except for fertilizer – which they split according to their profit share. Some investors have the operators pay for it all. Many times these relationships stay intact for generations.
Some years there’s ok cashflow, sometimes there’s not. But, if you can buy low it can be a homerun. One investor I chatted with bought several pieces of land at $1100/acre. Now it’s worth $10,000-$11,000/acre.
My general take is that as commodity prices have been high the last 15 years or so, farmland prices have appreciated greatly. I think we’re going to be in for a number of years of low commodity prices, and, consequently, I think farmland prices will level off and decrease in some places. I see an opportunity to buy in 5-10 years, but good deals could, of course, be had at any point in time.
How do I conduct due diligence?
If you want to invest in farmland, first, know where you’re going to buy, and learn about the crops that can be grown there. Spend time talking to local farmers, reading, and studying…then, start looking for opportunities.
Some excellent resources for due diligence and knowledge are:
- Farm Journal magazine/website
- Your local Farm Service Agency which will have statistics on rain fall, crop yields, and much, much more information
- The local coffee shop where the farmers will tell more than you ever wanted to know.
Some things to consider, in no particular order:
- Will you buy irrigated or dryland?
- What is the usual crop rotation?
- What’s the net return of the crop?
- If irrigated, what are the water costs? If there is a sprinkler system on the land, what’s the quality of it?
- If dryland, how much rain do they typically get?
- Costs: What are seed, fertilizer, insurance, taxes?
- In looking at an operator/farmer: Are they older, experienced, but perhaps outdated on technology? Are they young and not aware of pitfalls? What type of equipment do they use? Will it get the job done?
- What is the local trend of land appreciation (or depreciation)?
- Where are the crop prices (and other crop prices)? Where will they be in a year? Five-years? And how will a range of commodity prices work for your investment?
- What are the water, mineral, and air rights and are those being purchased along with the land?
- What are the tax benefits/depreciation? (often this is pretty minimal unless there are buildings on the land.
All in all, farmland investing can be a great diversification strategy that has more-than-economics benefits. But, there is a significant amount of research and due diligence that should be conducted before buying. This should be an introductory step to get you pointed in the right direction, but as always, find and interview local experts and do as much due diligence as possible.