institutional investing in farmland
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Institutional investing in farmland vagues d elliott et fractals forex

Institutional investing in farmland

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More demand for meat means more demand for grain. Cereal crops like corn, rice, and wheat form the foundation of human diets on their own, but they are also key to meat production. For example, it takes roughly six pounds of grain to produce one pound of beef. And every bit of that grain is grown on a farm.

Our growing numbers as well as rising global incomes together mean that our need for high-performing farmland is more acute than ever and will remain so. Clearly, arable land is going to be called on to do a lot of heavy lifting in the next few decades. The U. Last year, U.

Part of the reason is that U. Another is the relatively temperate climate across much of the country. But the biggest driver of U. In , news outlets around the world reported on a University of Sheffield study finding that the planet had lost a third of its arable land in about 40 years. A study by the American Farmland Trust calculated that we lose about 2. Much of this land is lost to urban and suburban development. Between and , more than half of urban and suburban growth happened on agricultural land, converting about 31 million acres to developed uses.

Source: American Farmland Trust. Other factors depleting our farmland supply are erosion and agricultural overuse. These can be prevented, and in many cases reversed, through skillful management. For all these reasons and many more including environmental health, farmer livelihoods, and rural cultures, to name a few , it is critical that we preserve our farmland and use it skilfully. One way to do that is through responsible investment. The laws of supply and demand point to a future in which farmland is not only a desirable investment, but a necessary one.

There are myriad arrangements by which landowners earn money from their farm investments. Here are the most common, ranging from the most hands-on management structure to a more passive arrangements:. In this scenario, the person who owns the land also farms it. Thus, they reap the total annual yield and are also exposed to losses during bad years.

As the owner-operator is responsible for running the farming business, this arrangement is the opposite of a passive investment. Many owner-operators have grown up in farming families and have extensive experience and possibly even formal education in agribusiness.

This is an arrangement in which a landowner pays someone a fixed rate to operate their land. The owner remains responsible for all the costs of operation—only one of which is payment for the hired operator—but also keeps the totality of profits. The operator commonly provides their own equipment. A landowner will need a bit of agribusiness know-how to adequately take charge of a farm in this scenario. Crop sharing is an agreement in which both the farmer and the landowner receive a percentage of farm profits; they sometimes also share a percentage of total costs.

Different agricultural regions have different norms for crop share arrangements. Crop sharing can often involve lower expenses for landowner but may entail some risk. The operator could well have other business priorities or land of their own, but any number of factors could detract from maximizing yields within the crop share.

Notably, the landowner is still exposed to commodity markets and crop risks. In this scenario, a farm operator pays a fixed cash rent per acre to the landowner. The farmer remains responsible for the entirety of the operation, and rent is usually prepaid ahead of the planting season, reducing the risk to the landowner of a bad year or price fluctuation.

This arrangement definitively carries the least risk for the landowner. The scenario you choose will depend on your agricultural knowledge level and how closely you want to be involved in the day-to-day operations of your farm. Throughout this guide, unless otherwise specified, we focus on the cash rent model because it is the most common arrangement used in AcreTrader's investment opportunities.

You may have noticed farmland investment making headlines recently, but this isn't a particularly new trend. Rather than your typical "safe" investments, like bonds or CDs, these institutions have seen farmland as a store of value with the potential for higher returns.

Of all U. Well above half of all farmland in the U. As farmland gains visibility, investors will continue to be drawn to its historically strong reputation of offering high returns, stability, and portfolio diversification. Please see additional disclosures for further information.

Louis and AcreTrader calculations. All returns are estimates and assume reinvestment of dividends. One reason for this is that land tends to appreciate over time. Another is that farmland generates annual income from growing crops. The returns you see in this chart comprise two factors: annual yield plus appreciation.

Yield is simply yearly income you earn from the farm operation. In other words, an operator makes money from growing a crop every year and selling it. Annual yield numbers see some variability based on the type of crop grown on the land as well as shifts in commodity prices. When calculating expected returns for the farm offerings on the AcreTrader platform, we generally estimate the annual income component of returns to range anywhere from 2 and 10 percent, depending on the offering structure, crop type, and local rental markets.

Farmland has also generally appreciated in value year over year. Internal Rate of Return, or IRR, is a common measure of investment returns, especially in real estate. When we calculate the expected IRR of a farm offering on our platform, we combine the average appreciation of 5. Sharpe ratios are a way of comparing the return potential of investments while taking into account their relative risk.

Additionally, farmland tends not to exhibit much correlation with other asset classes. While these do give investors exposure to the asset class of farmland, they tend to be more prone to market fluctuations because once farmland is securitized and turned into a fund, the value of the fund is somewhat divorced from the underlying asset. Limited volatility is one of the features investors like most about farmland, because it can help stabilize a portfolio during periods of recession.

In fact, farmland returns have been positive every year for the past 30 years, swinging at most between larger and smaller positive returns. Finally, many investors see farmland as a viable hedge against inflation. No other asset class has tracked as closely to these two primary measures of inflation as farmland. Owning multiple farms in different geographic locations, diversifying by crop type, avoiding debt in most transactions, and holding assets for extended periods to allow for appreciation are a few tactics that keep farmland investment risk in check.

We help investors gain access to farmland without having to directly manage most of the technical aspects themselves. The first step, of course, is finding farms for sale. The agricultural land market is relatively narrow and largely offline; many farms never go to auction or get placed in a centralized listing service. Quality land is much more likely to change hands via private transactions powered by regional networks of farmers, landowners, brokers, agents, funds, and institutions.

Here at AcreTrader, for example, we make hundreds of phone calls every week, tapping all of the resources listed above and more. Many of the farms we offer on our platform originate with individual farmers who reach out about farms in their area or about selling their own land. Put simply: to find land to buy, you need to search on a local level.

An experienced broker can help you extend your network and your access to quality deals. One appealing aspect of farmland is the advantage you gain when you know the asset well. Regional knowledge is the foundation of that understanding. What constitutes a high-quality farm depends on its agricultural region. In the Midwest , for example, soil productivity, drainage, and price per tillable acre will come into play, whereas in the Mississippi River Delta , irrigation and crop types are larger concerns.

And on the West Coast , where many permanent crops like almonds, apples, and pistachios are grown, water access is all-important. Depleted groundwater and extended drought can cause issues on farms that lack strong water rights. Three of the primary points to considering when valuing agricultural land are:.

Farm income: Income is based on consistent crop yields. Farm income can be affected by many different factors, including soil quality, water access, topographical features, historical yields, the local tenant market, and proximity to highways and other shipping routes. For investors, income depends on the expected rental rate for the farm.

To find rent information in the area, you often have to rely on trusted advisors with a local presence like brokers, farm managers, or farmers—folks who have a good pulse on the market. Despite this attractive constellation of characteristics, farmland has not enjoyed a great deal of institutional attention over the past half-century or more.

Institutional investors interested in getting into the farmland sector have been stymied by a perceived lack of opportunity, coupled with a perception of managerial difficulty in handling farmland as an asset. Nevertheless, managers have been unable to find appropriate properties to acquire. In large part, this is because of a shortage of human, rather than fiscal, capital. Farmvest, another California-based consulting group, estimates that there are only about 40 investment managers working in the agriculture space.

With so few boots on the ground, finding and purchasing appropriate farmland can be very difficult. Lack of Knowledge about a New Asset Class: Farmland is a much less mature asset class than real estate, in terms of professional asset management resources available to investing groups. The boards of institutional investors, such as pension funds, are generally lacking familiarity with agriculture as an asset class, meaning that every new investment decision requires a rather laborious process of educating the board before asking them to take action.

Opaque Farmland Valuations: Institutional investors have been discouraged from farmland investing because farmland valuation can be a completely opaque question, particularly to fund managers with no experience in the sector. The vast majority of properties are held by private owners and ownership changes can occur at intervals of decades or even lifespans rather than annually or quarterly. Agriculture is attracting higher levels of interest from institutional investors in recent years, driven by the growing global demand for food and the need for portfolio diversification and stronger returns.

Population growth is coupled with the demand for increased quality and quantity of diet among the emerging middle class. Humans are projected to consume more calories; 3, daily per capita in as compared to the current consumption of 2, daily per capita.

Meanwhile, arable land on which to produce this food is only expected to increase to 1. Need for Stable Assets: Interest rates have been at record lows for much of the past decade. This creates a strong incentive for fund managers to move assets out of fixed-income investments, which are vulnerable to interest rate hikes, and into stable assets that perform well in an environment of rising rates.

Timber and agricultural assets, which produce strong perennial income streams uncorrelated to interest rates, are a strong candidate for such asset reclassifications. Desire for Diversification: Agricultural assets provide the diversification that institutional investors are perpetually seeking out. Farmland historically has not correlated with other asset classes such as equities and securities.

It performs based on both the underlying value of the land itself and the valuation of the crops grown on it. Unlike the stock markets rapid fluctuations, agricultural land values change far more slowly and within a narrower band of value.