Alts for All strives to educate its readership on the rapidly evolving alternative investment space and empower them to optimize their personal portfolios through the thoughtful addition of alternative assets. This guide is the first of a series of pieces that will highlight and provide an overview of each of the major alternative investment asset classes.
We’ve decided to start by highlighting the farmland investment space for two reasons. First, as an asset class, farmland possesses favorable characteristics attractive to a wide range of investors. Second, the stable, low-volatility nature of farmland as a long-term investment asset is particularly appealing amidst the current macroeconomic/market environment. We collaborated with our friends at FarmTogether, a leading farmland investment platform, to create a comprehensive guide to the farmland asset class.
Prepare for Inflation and Volatility
From February 2020 to the present, many individual investors with large portions of their portfolios allocated to public equities have experienced significant fluctuations in the value of their aggregate holdings. In this instance, the dip was fleeting and represented the fastest decline in market history; previous recessionary periods have typically occurred over the course of a year or more. This time, the story was markedly different. As illustrated in the graph below, the S&P 500 took only 126 trading days to swing from a record high in February, to a 35% drop in mid-March, to a new record high in August. As of today, the stock market and its indices have continued to build on this stunning recovery from March 2020 lows, having recently set and subsequently surpassed several all-time highs.
Despite these seemingly positive recent market developments, investors taking a long-term view would be wise to maintain cautious optimism and a grounded perspective. As was evident with the onset of COVID-19 and its unprecedented market reaction, market volatility, along with other potent macroeconomic drivers such as consumer sentiment, preferences, and spending, are very difficult to consistently and accurately predict. However, volatility is just one of the two major challenging dynamics that investors currently face. The other is inflation, which seems increasingly likely with the Federal Reserve pumping cash into the economy with near-zero interest rates and Congress signing into law various stimulus and relief packages. These contributors to inflation were also two of the largest drivers of the nation’s (and world’s) economic recovery and served as potent interventions which helped stave off a scenario far worse than that which actually transpired. Nonetheless, looking forward, these measures have left the market meaningfully vulnerable.
Taking into consideration the prevailing market environment described above, investors should ensure they take action and make changes to their portfolios accordingly. One important high-level lesson which investors should take away from the COVID-19 period is the importance of allocating a portion of their portfolio to stable, low-volatility assets with a demonstrated history of consistent performance. When giving equal weight to these characteristics, farmland stands out as an option worthy of serious consideration.
Alts for All is encouraged by the increased access which retail investors now have to farmland and believes this broadened availability represents a distinct and compelling opportunity for portfolio enhancement in any market environment. To help investors better understand the farmland asset class and the nature of the opportunity it offers, we collaborated with our friends at FarmTogether, a leading farmland investment platform to create a guide explaining everything you need to know about farmland investing. While each individual investor should make choices appropriate to their specific circumstances, Alts for All believes the inclusion of farmland in an investment portfolio could lead to “greener pastures”.
Farmland investing may seem like a foreign concept, even to those familiar with real estate investing. That’s because historically, investors have struggled to enter this market due to high barriers to entry. However, with the “tectonic shift” in farmland ownership we’re seeing and the introduction of crowdfunding platforms, this is changing. You are now able to reap the benefits in your portfolio with access to the $2.5 trillion US farmland market.
Farmland investing offers a meaningful and differentiated opportunity to diversify your holdings; it combines the best attributes of several alternative asset classes rolled into one, yielding a historically stable, low-volatility offering. Plus, by investing directly into farmland, you are funding the costly transitions to sustainable and climate-change-friendly agriculture. In other words, farmland has the potential to be a “double bottom line investment” where you can have a direct, positive impact on the future of the planet without sacrificing returns.
As one of the best passive income investments, farmland offers a reliable return in the form of both price appreciation when the land is sold and passive income from lease and crop payments. In fact, for the last 47 years, returns to farmland in the US have averaged nearly 11%.
Farmland is also one of the most recession- and inflation-proof investments around due to the perpetual need for farming in any economy – society needs the food and other agriculture outputs produced by farmland, and this will never change. However, as rapid population growth results in a higher demand for food, the supply of arable farmland is constantly decreasing. This makes farmland real estate particularly well-suited to appreciate over time; over the past ten years, American farmland has risen in value by more than 6% annually.
At a higher level, farmland as an asset class benefits from several potent macroeconomic themes:
Aging population of farmland owners
According to the USDA, the average age of an American farmer today is 57.5 years. As this trend continues, it is likely that an increasing number of retiring farmland owners will seek to sell their property.
Potential for disruption of generational transfer as younger generations seek other career paths
Today, 96% of American farms are family-owned. That number is primed to decline as younger generations, who have grown up in an increasingly interconnected world, seek to deviate from their families’ agricultural business. As heirs to the agricultural assets of their family, a considerable portion of this land is likely to be sold by these individuals in the coming decades.
Proposed tax policy changes will make it less advantageous for farmers to pass along their farms to the next generation
Even for families that wish to transfer ownership of farmland to the next generation, currently proposed tax policy changes would make doing so less financially attractive than it has been historically. Farmers cite current proposals to change the dynamic of the estate tax (i.e. a reduction in the total estate tax exemption), a rise in capital gains rates, and loss of the step-up in cost basis for land that is inherited via estate as primary concerns in the coming years. These concerns are less substantive for institutionally managed farmland, but are likely to provide new opportunities to acquire high-quality farmland assets that have never previously been for sale.
Farmland in the United States continues to become scarcer
According to the American Farmland Trust, in the past 20 years, total farmland in the United States has decreased by 31 million acres (an area roughly the size of the state of New York). Furthermore, during a similar time period, the United States lost 11 million acres of its best and most productive farmland to urban and suburban development. These dips in total availability are substantive drivers of farmland value accretion.
Climate change will be a potent driver of change in the farming and agriculture sectors, but investing in sustainable agriculture can be highly profitable and also help to lessen future environmental damage.
FarmTogether has a great write-up on the intersection of farmland and climate change. With climate change as a highly potent and confounding variable, investing with partners who not only intimately understand the relationship between climate change and agriculture, but also how to mitigate climate-related risks to investing in farmland, will be crucial to long-term success in the asset class.
How does farmland produce returns?
Farmland produces returns for investors in two ways: 1) value appreciation of the land itself and 2) income generated from the operation of the farm and the sale of its outputs and/or services AND money paid in the form of cash rents when the farmland is leased by landowners to farmer operators. As a longer-term asset class, those who realize success in farmland investing are those that hold land for 5-10 years or more to take full advantage of consistent and substantive value appreciation. To capture this value appreciation, intimate knowledge of the market and factors such as location, weather patterns, commodity markets, crop types, and suitability, among many others, is required.
For a more in-depth overview of farmland returns, refer to this piece from FarmTogether.
Does farmland have a place in my aggregate investment portfolio?
Historically, farmland was a highly restricted asset class for financial investors to the point that only very wealthy individuals and institutional asset managers could gain access to its benefits. However, because of platforms like FarmTogether, that is no longer the case. Now accredited investors can participate in the ownership of farmland, and thus benefit from increased portfolio health due to several positive attributes of farmland as an asset.
Today, farmland is an asset that deserves strong consideration for a place in the majority of individual investment portfolios.
In summary, it offers the following benefits:
Strong risk-adjusted returns
Low correlation to public equities and the broader market
Potent hedge against inflation
Low volatility asset with a long demonstrated history of consistent returns
But don’t take our word for it! Nuveen, a top 5 real estate manager globally and the #1 manager of farmland worldwide with $1.2 trillion in assets under management, lays out a compelling case for the asset class through a series of graphs showing its resilience to U.S. recessionary cycles, superior risk-adjusted return relative to fixed incomes products, superiority as a hedge of volatility. For those that wish to take a deeper dive, they can access that information here.
The FarmTogether Edge
As we mentioned, farmland is becoming increasingly accessible, thanks in part to technology-enabled platforms such as FarmTogether.
Top-Tier Investments with Competitive Returns
FarmTogether’s Investment Philosophy is second to none, as the team aims to ensure longevity not only for their investors’ portfolios, but also for the property, planet, and future food supply. Through their proprietary sourcing technology and strategic partnerships, FarmTogether sifts through hundreds of on-market and off-market opportunities across the United States to bring only the best deals to their investors. In fact, only 3% of deals that enter their pipeline are offered on their platform.
First, the team takes a macro view, examining climate change, water availability, structural regional trends, regulatory landscapes, and long-term trends in agricultural yields. Second, they consider the end markets for the farm products, such as supply, demand, consumer preferences, transportation costs, and storage infrastructure. Finally, they conduct a property analysis, which examines soil and water quality, cost of inputs, capital improvements, wages, and more.
FarmTogether targets investment opportunities that can offer 7-13% annual returns with 3 - 9% cash yields - all net of fees. For further diversification, they offer a mix of permanent and row crop opportunities, ranging from corn and soy to apples, pecans, and almonds.
Easy-To-Use Platform With Low Investing Minimums
Within FarmTogether, investors have a single, easy-to-navigate platform for evaluating investment opportunities, reading diligence materials, and signing legal documents. Once an investment is confirmed, investors can monitor their investments within the FarmTogether platform, where they’ll find refreshed key performance indicators on productivity, current land value, and more.
Investors will receive quarterly or annual cash distributions through crop yields and lease agreements, in addition to capital gains from the sale of the property at the end of the investment hold period, which ranges from 5-12 years.
Better yet, FarmTogether doesn’t require the high investment minimums typical of other alternative investments — accredited investors can get started for as little as $15,000. Plus, FarmTogether’s fees are lower than the industry average.
Committed to Funding Sustainable and Prosperous Farming
As issues like climate change, world hunger, and poverty take center stage, it will become increasingly important for investors to back ESG-centric companies. In addition to offering investors access to a top-tier asset class with a strong risk-return profile, historically low volatility, and a hedge against inflation, FarmTogether provides investors with a unique opportunity to drive positive impact on climate change.
The farms of the future will need to support a rapidly growing population amid a changing climate and increasingly scarce natural resources. Research shows that with proper management and by incorporating high-tech and sustainable approaches, farms can magnify as well as preserve their yields. However, these transitions can be costly, most often presenting a barrier for farmers.
That’s why FarmTogether's mission is to bring creative and transformative capital to farming, while opening up a vital asset class to all investors. By driving abundant and creative capital to farmers, investors have the opportunity to drive agriculture toward sustainability on a massive scale.
FarmTogether investors are providing the key financial building blocks for a sustainable future.
To learn more about FarmTogether and its current offerings, visit farmtogether.com.