You Don’t Have to Buy The Farm: Investing in Farmland
In today’s uncertain investment environment, stock markets remain on edge and bond prices are headed toward their third year in negative territory, leading more investors to alternative investments to gain stability and inflation protection. In the alternative space, investments in “real” or tangible assets are capturing market attention — particularly in farmland. When one thinks of farms, cows and dust bowls, droughts and aging farmers may come to mind — not consistent, competitive returns, low volatility (compared to stocks) and diversification.
In the United States, institutional adoption is gaining traction as some of the most prestigious investment names in the industry are investing in farmland. Investment banking firm UBS began investing in farmland in the 1980s and continues to expand its portfolio across the agriculture vertical. The Swiss powerhouse is currently the owner of over 280,000 acres across 15 states. Another major investor, the Teachers Insurance and Annuity Association, or TIAA, is one of the biggest retirement providers and controller of about 2 million acres of farmland. Along with asset managers and state pension funds, Microsoft founder and philanthropist Bill Gates is a notable farmland investor, owning around 270,000 acres — but with approximately 900 million farm acres available in the U.S., Gates owns just a slice of the pie. In fact, institutional investments comprise less than 2% of U.S. farmland. But is there an opportunity for a shift in ownership?
American farmers are getting older. According to the U.S. Department of Agriculture (USDA) 2017 census, which is performed every five years, the average age of a farmer was 57.5 years old, and 34% of farmers were over 65. As this generation ‘leaves the fields,’ there is the potential for further institutional investments. In fact, one estimate shows that over 40% of U.S. farms were expected to change hands between 2015 to 2035.
The landscape is evolving in terms of production as well. Smaller farms comprise the overwhelming majority of total farms, but larger-scale farms dominate production. Non-family farms, not owned by a farm operator or relatives, make up only a tiny portion of farms owned but proportionately a larger share of production.
Share of Farms vs. Share of Production
Unlike other asset classes, there is always a need for food. However, the world’s population is growing while the food supply is shrinking. This presents a market ripe for innovative solutions and capital to scale that research. Food production will need to increase by over 50% by 2050 to continue feeding the world.
According to the United Nations, population is expected to continue to increase. Globally, there were eight billion people on November 15, 2022; by 2050, that number should reach 9.7 billion, and by the 2080s, estimates climb to over 10 billion. At the same time, food resources are becoming more scarce — disrupted supply chains, climate change, geopolitical strife and extreme weather events — are just some of the reasons.
This shrinking global food supply, combined with an increasing population, is causing an upswing in cropland values.
Average Cropland Values in the US
Investing in farmland has provided attractive historical returns. Over the past 20 years, the NCREIF Total Return Farmland Index has outperformed stocks, bonds, real estate, U.S. REITs and gold.
Asset Class Performance 1992 - 2022
Source: Data are based on annual total returns from January 1, 1992 through December 31, 2022. Asset classes are represented by the following indexes: Stocks – S&P 500; Bonds – Bloomberg Barclays U.S. Aggregate Index; Privately Held U.S. Farmland – NCREIF Farmland Index; Privately Held U.S. Commercial Real Estate – NCREIF Real Estate Index; Publicly Traded U.S. REITs – FTSE Nareit U.S. Real Estate Index. Indexes are unmanaged and unavailable for direct investment.
Given the stable demand for food, farmland has historically experienced less volatility than both traditional and other alternative asset classes. This portends well in an environment of increasing volatility. Additionally, when looking at investing in farmland compared to other alternative assets, farmland has less volatility as it derives its total return from both appreciation and income from rent.
Volatility, as measured by the CBOE Volatility Index, or the VIX, has trended downward following Covid-19. However, amid the continued fight against inflation and fears that interest rates may stay higher for longer, the VIX is up 12% for the past three months and 19% in September alone. Meanwhile, the standard deviation for farmland is just 6.64% — closer to bonds at 5.60% — than stocks at 17.80%.
While traditional financial instruments can lose value in an inflationary environment, the opposite is true of investing in farmland. Investors get the benefits of an asset class that has historically risen in strong correlation to the consumer price index (CPI). Equities and technology stocks, in particular, are susceptible to inflation movements.
Despite 11 rate hikes, inflationary pressures remain — prompting the U.S. Federal Reserve to keep rates high until inflation sufficiently cools. Farmland is positively correlated to the CPI, rising as much or more than the inflation index, while bonds and equities lose value. Farmland returns are also historically uncorrelated to the returns of other asset classes, providing an optimal diversification property.
Correlation to Inflation
Source: Inflation as measured by the U.S. Consumer Price Index. Based on annual total returns from January 1, 1992 through December 31, 2022. Asset classes are represented by the following indexes: Stocks – S&P 500; Bonds – Bloomberg Barclays U.S. Aggregate Index; Privately Held U.S. Farmland – NCREIF Farmland Index; Privately Held U.S. Commercial Real Estate – NCREIF Real Estate Index; Publicly Traded U.S. REITs – FTSE Nareit U.S. Real Estate Index. Indexes are unmanaged and unavailable for direct investment.
As institutional interest in farmland grows, so does the responsibility that comes with it. Along with innovation, these investment managers have an obligation to protect farmland and ensure future sustainability. Increasingly, institutional managers are integrating environmental, social and governance investment practices in their performance measurements.
In turn, farmland’s increasing ESG objectives may attract an even wider array of investors. Gen Z and Millennials account for approximately 43% of the U.S. population; they are the largest part of the workforce and increasingly invest in assets with exposure to ESG. And as more wealth transfers to these generations, their investing influence will as well.
Given the significant impact agriculture has on the environment, the industry is ripe for opportunities to improve ESG. Institutional investment in farmland can help drive future innovation as well as increase sustainability through:
Investing in farmland offers an opportunity for investors to contribute to the sustainability of agriculture. But extreme weather events, as well as geopolitical crises, are increasing in regularity, presenting headwinds for space.
Combined, Ukraine and Russia are one of the world’s largest producers of grain, and the ongoing war has disrupted the global food supply chain — including Russian President Putin’s recent refusal to resign the Black Sea Grain Initiative. The war has altered both the consumption and trade routes of grains such as wheat, corn and soy. And a recent diplomatic dispute between Canada and India threatened to cut off the supply of potash, a fertilizer, to India’s agriculture sector.
Extreme weather patterns — from excessive rainfall to unprecedented heat — can cause enough damage to ruin a season’s crops. A multi-year drought in the Great Plains has driven up the price of hay and pushed stocks of the crop down to levels not seen since the 1950s while also causing unharvestable conditions for wheat. Hurricane Idalia ripped through Florida in late August and caused widespread damage to the state’s agriculture sector. Estimates are between $78 and $371 million of losses across peanuts, cotton, cattle, poultry and aquaculture operations.
But these events could also spell opportunity, increasing the demand for land and pushing food prices higher. While food prices have retreated from highs seen during COVID-19, they are still higher than pre-pandemic.
World Food Price Index
U.S. farmers are aging, opening a potential opportunity for investors to consolidate these smaller tracts, scale and drive new growth. And given low — but increasing — institutional interest, we may be in the early stages of farmland growth. However, investing in farmland presents both unique advantages as well as complexities. Where should investors begin?
Direct investment opportunities are available, including buying farmland and investing in commodities such as wheat, corn or soy, but those present additional challenges. More avenues to invest in farmland are presenting themselves to individual investors, however, as with any alternative investment, these require due diligence and professional guidance.
To learn more about the investment trends private fund managers are seeing in the farmland space, reach out to our Investor Relations team members, who would be happy to discuss with you.