Farmland: an overview of the real asset alt

An introductory
guide to investing in farmland

December 12, 2023

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When saving for retirement, a typical investor may have two goals: maximize returns and minimize risk.

Investing in alternative assets provides the opportunity for both. From real assets to venture capital to private equity, alternative assets are known for their potential returns and portfolio diversification provided while mitigating risks from market downturns. 

However, there’s one asset class investors tend to overlook while building their portfolios, despite the fact that it has delivered an average annual return of 12.24% for decades and shown relatively lower volatility. (Any guesses which asset class we’re talking about? Hint: Bill Gates is considered the largest private individual owner of this asset in the US.) 

Today, investing in farmland as an alternative asset is increasingly accessible for individual investors. Here’s how you can diversify your portfolio by getting in on farmland investment opportunities.

In this overview, Alto covers:

1. Why investing in alternative assets can be beneficial
2. Three potential benefits of farmland investing
3. How farmland may perform in years to come
4. Ways to begin investing in farmland today

First things first: what are alternative assets?

Alternative assets are financial assets that do not fit into conventional stock, bond, or cash investment vehicles. With an Alto IRA, individuals can invest in alternative assets like real estate, private equity, startups and venture capital, and yes, even farmland.

Adding alternative assets to your portfolio offers beneficial diversification

While many investors focus on traditional public market investments — like stocks, bonds, mutual funds, and ETFs — high-net-worth individuals and institutional investors tend to allocate upward of 10% of their portfolios to alternative assets. 

This strategy is rooted in the fact that alternatives can enhance portfolio diversification. 

Portfolio diversification can reduce the likelihood of large total losses by spreading investments across different asset classes, which are ideally uncorrelated to one another. Even if a negative event impacts one holding, diversification can reduce the risk of it impacting all of them. 

Why is that?

Alternatives are largely non-correlated to the public markets

More than half of Americans report investing in public markets. However, the performances of these common investments can be interdependent on macroeconomic conditions. As a result, the traditional 60/40 portfolio for individuals saving for retirement may be less resilient today compared to recent decades.

Meanwhile, high-net-worth individuals (such as Bill Gates, Ted Turner, and Jeff Bezos) and institutional investors tend to allocate funds outside of traditional stocks and bonds. 

It’s not just the ultra-wealthy who leverage alternatives. Professional investors such as registered investment advisors also utilize these less traditional assets. According to a 2022 survey by Cerulli Associates, advisors allocated, on average, 14.5% of assets to alternatives and aim to increase that percentage to 17.5% by 2024. Their reasoning for doing so?

The stock market is typically dependent on interest rates, the bond market, and the economy, while a notable amount of inflow goes directly to index funds. In fact, as of 2021, roughly $11 trillion was invested in index funds.

As for the bond market, Art Cashin of UBS reports that if the yield on ten-year bonds reaches 4.22%, more money goes into the stock market. Conversely, if yields reach 4.35%, more money goes into bonds. Simply put, investors are faced with a tight range tied to interest rates.

52%

cited general portfolio diversification

69%

cited reducing exposure to public markets

66%

cited dampening volatility and protecting from downside risk

Following recent spikes in inflation, investors increasingly look to real assets and alternatives (i.e., real estate) over financial assets. Among these growing asset classes, American farmland stands out for its decades-long track record of positive returns and ability to diversify portfolios.

3 reasons to consider adding farmland to your investment portfolio

According to the USDA, the wealth of the farmland sector is expected to hit $3.57 trillion in 2023, while the sector’s assets are expected to hit $4.09 trillion.

On top of these valuations, here are three potential benefits to investing in farmland.

Farmland has shown impressive annual returns and appreciation

More and more investors are adding farmland to their portfolios due to its history of performance across two criteria of evaluation:

Land appreciation

Since 2009, the average US cropland value has risen by about 5.3% annually. Meanwhile, a 2016 analysis by researchers at the MIT Center for Real Estate found commercial and multi-family investment properties in the US have an overall average depreciation rate of 1.5% per year.

Consistent cash flow

Opportunities for consistent cash flow include cash rent yields for any leased acreage and crop yields, which stand to become even more profitable with regenerative farming practices.

Overall, US farmland has outperformed all other asset classes, excluding the Dow Jones REIT Index, over roughly 20 years. Where the public markets offer the potential of both major peaks and downdrafts, farmland as an investable asset class has offered steady returns.

Farmland has shown relatively low volatility for decades

As Craig Wichner, Founder and Managing Partner at Farmland LP, explains, farmland is considered a “timeless asset class” and is helpful for anchoring a portfolio. 

In practice, farmland returns have shown notably less volatility than a range of other asset classes, such as gold and the S&P 500. According to Wichner, this is why a number of Farmland LP investors who made their money in the technology industry then elect to keep that money in farmland.

Farmland is notably non-correlated to public markets

Within commercial real estate, common assets like multi-family housing, office buildings, and industrial facilities are differentiated but still sensitive to macroeconomic factors, business cycles, or the debt markets. 

For instance, the International Monetary Fund reports tighter financial conditions tend to impact commercial property prices by making it more expensive for investors to finance new deals or refinance existing loans, which lowers total investment in the sector.

By comparison, farmland has historically shown little-to-no correlation to other real estate and stocks, as shown by the NCREIF Farmland Index. As a result, in the event of a recession or economic crash, this asset class should remain relatively unaffected.

Farmland is projected to be high-demand, low-supply in years to come

Farmland holds yet another advantage over other forms of commercial real estate asset classes: simple supply and demand. 

The supply for industrial space and housing only continues to grow: In late 2021, the number of multi-family housing units under construction nearly reached a 50-year peak. At the same time, the true demand for or usage of these homes and offices has not kept up — highlighting the elasticity around these asset classes. 

By comparison, the supply of viable US farmland is relatively inelastic, while the human need for food (the core output of farmland) is non-negotiable.

At the same time, global population growth and its resulting demand for food show no sign of slowing down. By 2050, the Food and Agriculture Organization of the United Nations predicts a 70% increase in food consumption. In other words, the supply of viable farmland is falling while the need for food only continues to rise — creating a supply-and-demand scenario that will almost certainly favor investors in farmland.

There is finite existing acreage, and converting open land into farmable acreage requires considerable time and resources. In fact, the US has lost roughly 1.5 million acres of farmland per year for the past three decades.

Loss of farmland can be attributed to two main causes: urban expansion along with poor institutional farming practices that destroy soil health.

Historical barriers to farmland investing are disappearing

In 2005, fewer than 20 farmland funds operated globally. By the end of 2017, that number reached 145 funds with an aggregated AUM of $32 billion.

The remainder of the sector is highly fragmented, with half of US farmland owners being independent farm operators. As a result, individual investors have long seen little-to-no opportunity to invest in farmland due to historical risks and barriers, including:

Even then, farmland has become an increasingly accessible asset class over the years due to new opportunities for individuals to invest in the sector without exorbitant upfront costs.

Capital requirements to meet economies of scale

According to Farmland LP, scale and crop diversity are two leading indicators of profitability in agriculture. As such, farmland investors may consider hiring a professional to oversee a diverse portfolio of crops.

Operational risks and unpredictability

Farmland’s output is ultimately determined by the natural conditions around it, which may be increasingly unpredictable due to climate change. For instance, annual farmland appreciation rates can average anywhere from 1% to over 7% depending on factors like irrigation, region, and crop type.

Interested in farmland? Here are 2 ways to start investing

REITs specialized in farmland

Any individual with a brokerage account and enough cash to buy one share can invest in these REITs, which makes them one of the lowest-cost avenues to farmland investing. That said, both present relative market risk as they trade on stock exchanges.

There are currently two publicly traded real estate investment trusts (REITs) that acquire farmland and lease it to farmers: Farmland Partners and Gladstone Land Corporation.

In 2023, Farmland Partners held 178,000 acres, growing roughly 26 row, permanent, and specialty crops across 20 states — making it the largest US farmland REIT by acreage.

In 2019, Gladstone held $876 million in assets, including more than 86,500 acres across 10 states used to grow fruits, vegetables, and nuts.

Technology-driven funds and investment platforms

In recent years, young companies have leveraged tech to expand access to farmland investments. One thing to note is many tech-driven funds and farmland-focused investment platforms are open only to accredited investors. Examples include:

Investors own shares of an LLC that holds the legal title to the farmland

An online marketplace for direct access to vetted farmland investment opportunities

Utilizes funds to purchase and convert acreage into higher-value organic and regenerative farmland

Farmland is a promising alternative asset to anchor a portfolio that may yield steady returns

For years, high-net-worth individuals and institutional investors have known the value of alternative assets for diversifying investment portfolios. 

Now, any investor can utilize this strategy for portfolio and investment strategy diversification. Investing in farmland can offer portfolio benefits including:

1.

Relatively low correlation to public markets and macroeconomic conditions

2.

A track record of positive performance and low volatility

3.

Projections to remain in high demand due to climate change

While the global public markets may remain unpredictable, farmland is poised to benefit investors in the asset class for decades to come.

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