Is Farmland a Good Investment?

There are many good reasons to invest in farmland. The global population is growing and becoming wealthier. This in turn leads to more (and improved) food consumption. The supply of farmland is also restricted. “We can print money, but we can’t print dirt”.

Farmland investors should also consider the way farmland provides an inflation hedge. Both because the supply of farmland is limited and because the output of farmland (food) is a core commodity.

So, is farmland a good investment? This post will compare two publicly traded farmland companies with the returns for stocks and other Real Estate Investment Trusts (REITs). We’ll consider two publicly traded farmland investments: Gladstone Land (LAND) & Farmland Partners (FPI).

What is Gladstone Land?

Gladstone Land Corporation is a real estate investment trust (REIT) that specializes in acquiring and owning farmland and related properties. The company’s primary focus is on owning and leasing farmland to farmers, farming operations, and other related businesses.

Gladstone Land’s portfolio includes a diverse range of crops and regions, including permanent crops like nuts, berries, and citrus, as well as row crops like lettuce, tomatoes, and corn. The company owns over 150 farms with approximately 108,000 acres of farmland in 14 different states across the United States.

Gladstone Land’s business model is built around owning and leasing farmland to high-quality tenants with long-term leases, which helps provide stable and predictable cash flows for the company and its investors. The company’s goal is to generate attractive total returns for its shareholders through a combination of regular monthly dividends and long-term appreciation of its farmland assets.

What is Farmland Partners?

Farmland Partners Inc. is a real estate investment trust (REIT) that focuses on acquiring and managing farmland in the United States. The company’s primary business is to own and lease farmland to farmers, farming operations, and related businesses.

Farmland Partners’ portfolio includes a diverse range of crops and regions, including row crops like corn, wheat, and soybeans, as well as permanent crops like almonds, pistachios, and citrus. The company owns over 160,000 acres of farmland across 16 different states, making it one of the largest farmland owners in the United States.

Farmland Partners’ strategy is to acquire high-quality farmland and then lease it out on a long-term basis to experienced farmers with strong financial profiles. The company aims to generate stable and predictable income streams for its shareholders through a combination of rental income and potential capital appreciation.

In addition to its core farmland leasing business, Farmland Partners also offers a range of other services to farmers and landowners, including crop insurance, harvest and storage services, and financing solutions.

Is Farmland a Good Investment?

Here are the results:

From February 1^st, 2013 until February 1^st, 2023, the IRR for investors in Gladstone Land was 6.30%. From April 11, 2013 until April 11, 2023, the return for Farmland Partners was 1.22%. This compares with the returns for the S&P 500 of 12.20%, the Vanguard Total Bond Market ETF of 1.35%, and the Charles Schwab US REIT ETF of 4.03%.

As this data shows over the past decade, stocks have been the best investment. This may be because operating companies can best apply technology their business. And, over time, this enables organizations to produce more outputs with less inputs. The economic gains from such activity seem to flow to the organizations that produce products & services and not to capital generally. Capital is only one factor of production. This may be why investments that rely on capital alone such as farmland investments may be poor investments in the long-run.

This may also explain why farmland investments have trailed the returns of the S&P 500, are similar to other REITs, but are greater than bonds.

Farming Might Still be Good

If you’re a farmer, you may still see a bright future for your business. Farmland might be an investment with returns as good as stocks depending on the location of your farm. Farmers can also employ a variety of methods to their operation to improve production and increase profits. Whereas absentee landlords such as those holding shares of Gladstone Land & Farmland Partners cannot.

As with all types of real estate, the location of farmland is also a key factor determining its value. Farmland on the edge of growing cities in North America may appreciate a lot faster compared to farmland located in places where alternative uses are less likely.

Farmers Have an Advantage over Landlords

As a passive investor in farmland, don’t expect to capture all the economic benefits.

Farmers will happily share crop your land for a portion of the proceeds. But, these profits will typically only cover the taxes and financing costs for the land. As a farmland investor, your returns will primarily come from the land value appreciation.

Farmland investors might also want to consider other land investments such as forestland for the same reasons. All land investments will produce small incomes relative to the appreciated value of the land. And if an investor’s objectives are long-term capital appreciation and environmental sustainability, then both farmland and forestland share similar return profiles.

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Click Here to read another post we wrote about Inflation & Debtors.