In 2020, it seems nothing is reliable, consistent or predictable. With everything changing so quickly, how can we feel confident when we're considering an investment? CD rates are very low, the stock market is full of volatility and commercial/retail real estate is struggling. There is still good news when it comes to farmland. Its potential for long-term appreciation, limited supply, consistent annual income, and lack of volatility are among the abundant reasons why it is worth buying.
Low interest rates
For many investors, low interest rates are an incentive to consider non-paper investments like farmland. With 10-year Treasury bond rates hovering near the bottom of their historic range, fixed-income investments are comparatively unattractive. Combining that with the fact that farmland values have been generally trending upward since the 1980s may indicate the time to consider buying farmland is now.
In farm real estate, the cap rate is cash rent minus property taxes, insurance and management, divided by the price per acre of the investment. You calculate the overall value of a farm by multiplying the per-acre price by the total number of acres. The tricky concept is that lower cap rates imply higher prices. Said another way, if multiple investors bid the price of farmland higher, then the cap rates decline.
Cap rates for conventional and organic farmland (around 3%) tend to exceed those for long-term bonds and CDs. This makes sense from a risk-adjusted perspective, in the sense that farmland is actively managed and its value derived from crop yields times the price of the commodity grown. In effect, farmland is an active investment rather than a passive, paper investment like fixed-income.
As with any physical asset, the amount of supply factors into its price. There is a fixed supply of farmland. Within the overall investment category, other attributes like soil quality, availability of water, proximity to urban populations and available transit nodes for product distribution factor into land value. Better soils, plentiful water and active local markets drive value, and highly fertile regions near large populations tend to have the most expensive farmland.
It seems almost impossible to believe, but Forbes reports that the global farmland market is valued in excess of $9 trillion. With new developments in fractional ownership and digital investment, it is possible for people to invest in farmland with just a few clicks on their computer, although most farmland investors prefer to feel, see and touch what they buy.
Forbes also says that from 1992 through 2016, farmland outperformed commercial real estate as an investment class by about 3.3%, a sizable margin for institutional investors. It isn’t surprising that all classes of investors are looking at farmland as a new investment class after years of semi-neglect by everyone but industry insiders. The appeal is not lost on global investment funds, which increased their agricultural holdings by over a factor of 10 in the 2006-2017 window.
In the aftermath of COVID-19, some investors are including farmland in their portfolios because of its intrinsic value with regard to food. People will always need food, even when other industries are suffering. Reinforcing the appeal of farmland is the fact that as an investment it does not have a lot of volatility, especially compared to gold, which is subject to large swings in value. Although gold has been the most prominent inflation hedge, farmland is proving to be a superior option as well.
As with every aspect of farming, Halderman Real Estate and Farm Management is at the forefront of changes in farmland investment trends. With nearly a century of experience, we can advise you with regard to adding to your portfolio or seeking out your first investment. Give our main office a call to start your farmland investing adventure.