The Ins and Outs of Farmland Investing
So you want to be a farmer.
Investing in farmland can make for an intriguing alternative to stocks. Farmland is fairly safe, historically a great hedge against inflation and is an asset class that does not correlate with the stock market. As the world’s population continues to grow (9.15 billion estimate by 2050) and the global middle-class continues to emerge (with changing dietary habits toward more calories and meat), farmland is poised to become an even more intriguing alternative investment.
This looks promising
In the United States, the price of farmland has roughly doubled during the last decade. Over the past 70 years, the appreciation of farmland real estate has easily outpaced the rate of inflation. And over the past 20 years, the total return of the NCREIF Farmland Index (a measure of the investment performance of various U.S. agricultural properties) has outperformed the total return of the S&P 500. Even during the worst of those 20 years for the U.S. stock market, the NCREIF Farmland Index managed a positive annual return every single year; posting only a single negative quarter (Q4 2001’s -0.01% return) out of now 85 quarters on record.
But the only problem is…
You may now be asking yourself “This sounds great! Why the heck I am not investing in farmland?!” The problem is that the average small retail investor has had few opportunities to participate in these gains. Investment vehicles have been primarily limited to wealthy accredited investors or corporations.
What’s behind barn door number 1?!
While there are not many direct investment options for small investors, there are a few publicly-traded near pure-play farmland companies. Some of these companies are a bit more pure-play than others though:
Cresud (NASDAQ: CRESY) is a very large Argentina-based farm company with about 2.4 million acres of land in Argentina (66%), Brazil (19%), Paraguay (13%) and Bolivia (2%). The company is a farmer of soybeans (making up 56% of its crops), corn (20%) and single digit percentages of sugarcane, sunflower, wheat and other grains. The company has livestock operations in beef cattle ranching, sheep herding and dairy cow milking. Cresud also has a 64.5% stake in the Argentina real estate developer in IRSA, which in turn owns about 30% of the Argentina bank Banco Hipotecario.
Alico (NASDAQ: ALCO) owns about 130,400 acres in Florida and receives about 44% of its revenue from the growing of citrus crops (primarily oranges to be used in juice concentrate). 38% of company revenues come from supply chain management (harvesting, hauling and marketing citrus crops for Alico and other growers), 12% of revenues from sugarcane, 5% from beef cattle sales and the remaining 1% from other sources (including land leasing, mining and oil exploration).
Limoneria (NASDAQ: LMNR) is a grower of citrus crops with about 7,850 acres of farmland and other real estate in California. Limoneria is one of the largest growers of lemons in the United States and America's largest grower of avocados. If you ever had guacamole with your burrito at Chipotle Mexican Grill, it most likely originated from Limoneria (Chipotle being a customer of Limoneria). Its citrus crops business makes up 88% of sales, with the remaining 12% derived residential, commercial and industrial from real estate development and rental income.
Adecagro (NYSE: AGRO) is based in Luxembourg, but owns about 725,000 acres across Brazil (66.6%), Argentina (32.2%) and Uruguay 1.2%). Much like fellow South American farmer Cresud, Adecagro is involved in the growing of various grain crops, sugarcane, cattle ranching and dairy cow milking. Adecagro also has business segments in coffee beans and cotton growing and ethanol fuel production.
Gladstone Land Corporation’s (NASDAQ: LAND) recent IPO makes it the U.S. farmland REIT of the group with its 1,750 acres. Gladstone Land acquires farmland across the United States and leases the land to corporate and independent farmers on a triple net lease basis (the tenants are responsible for paying property taxes, insurance and maintenance). Gladstone Land's business is to simply collect the rent payments, negotiate lease agreements and look for new farmland purchase opportunities.
Management intends to use the proceeds of the January IPO to acquire additional farmland, diversifying the company regionally (away from its 1031 acres and 600 acres in California and Florida respectively) and across tenants (currently with 70.8% of rental income from a single tenant, Dole Food Company). The company began that diversification process in April, acquiring of a 119 acre farm in Michigan.
Before you decide on South America…
Farmlands in Brazil and Argentina are some of the most fertile, productive and sought after in the world, but investors looking at the continent should be cautious. Brazil and Argentina both rank low on various global property rights indexes, have a history of nationalizing private businesses and currently have laws that place certain limits on the foreign ownership (individuals and corporations) of farmland.
South American countries like Chile and Uruguay are much more foreign business friendly and better protectors of property rights. But Chile (very mountainous) and Uruguay (small country) offer comparatively fewer farmland opportunities for investors than the much larger and farmland-rich Brazil and Argentina.
North America is safer, but with a small caveat.
In the United States though, American property rights and the legal system allows investors to sleep at night knowing their investments are safe and secure. There is no risk of waking up one morning to find that the country’s farmlands have suddenly been nationalized. Our American rule of law ensures a much safer environment for farmland investing, not to mention that the United States has some of the best farmlands in the world.
That is not to say that America makes for a prefect farmland investing environment. A handful of individual states prohibit the corporate ownership of farmland. Such a restriction is actually written into Nebraska’s state constitution. Similar issues crop up in our neighbor to the north. There are no Canadian national-level restrictions for foreigners, but certain provinces limit foreign ownership, while others provinces having no ownership restrictions at all.
Not to burst your bubble…
Since the financial crisis, one of the favorite pastimes of financial commentators is to call the next asset bubble. Farmland is not immune to this talk, especially after the past decade with farmland prices having doubled. The Federal Reserve’s policy of ultra-low interest rates has certainly helped to fund the recent purchases of farmland across the country. And although farmland real estate bubbles are extremely rare (only one in all of the 20th century), a bubble did pop in the 1980s.
How’s the weather today?
In addition to foreign government and U.S. Fed policy risks, there are of course industry-specific risks associated with farmland investing. One of the biggest is unpredictable weather patterns (droughts, floods, heat waves and cold spells) which can damage crops. Other risks include crop and livestock diseases, soil degradation and plant-eating pests. The farmlands themselves are also highly illiquid, much more so than other types of real estate assets. An individual or corporation wishing to divest a piece of farmland would find it difficult to do so in a timely fashion (unless the seller is willing to pay for the privilege of expediency).
Still want to be a farmer?
Farmland investing is not without its risks (as with all asset classes), but it has historically been a good alternative to stocks and a great protection against inflation. And while there are few opportunities for the small, non-accredited, investor to directly invest in farmland, these handful of publicly-traded companies can offer investors with the next best thing.