Farmland Investing: An Untapped Global $10T Market

By Staff

There’s no other asset class quite like farmland. The global supply of farmland is continually decreasing, yet it produces one of the most essential resources for human survival – and this demand for food is only growing. It has also performed historically well as an investment opportunity, offering investors stable returns, low correlation with other asset classes, and a reliable hedge against inflation. Yet, even today, 86% of all farmland is family-owned while the rest is largely owned by billionaires or big institutions.

Let’s dive into why farmland has been a historically overlooked investment opportunity, why there’s incredible value in this asset class, and how investors can get started in this once out-of-reach opportunity.

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Several reasons have kept farmland out of reach for most investors. Like many other alternative investments, farmland was clouded by a host of barriers, including a lack of market transparency and high costs to entry. In fact, the first industry-wide benchmarking index was not created until 1991. Though tremendous advancements in transparency have occurred, it’s taken almost 30 years for this index to reach 1,000 properties and $10 billion assets under management. For comparison, the commercial real estate counterpart - created just 13 years earlier - holds ten times as many properties at 78x the market value. The price of land isn’t cheap, either. In some areas of the United States, the cost per acre can top $10,000.

The world’s global farmland and agriculture systems are collectively valued at roughly $10 trillion and it’s forecasted to grow over the next several decades. In order to meet the rising food needs of a global population that’s expected to reach 9 billion, experts estimate that farmers will have to double the number of crops grown by 2050. The use case for many crops is also expanding; in fact, it’s estimated that only 55% of crops are eaten by humans. The first generation of biofuels has come from wheat, corn, soybeans, or sugarcane, while the cosmetic industry is expected to increase its demand for vegetable oils. These factors have presented an unprecedented opportunity for today’s farmers to look for ways to increase efficiency and magnify their yields while using the same resources.

This growth is occurring simultaneously against the backdrop of climate change. At the UN’s Climate Change Conference in November of last year, world leaders called for urgent action and innovative solutions to achieve widespread sustainability across the globe, particularly within agriculture. In 2021, there was an incredibly vast and fast-growing number of initiatives underway to promote sustainable food systems and combat climate change through agriculture – and investors are taking note.

Farmland has been a historically consistent and reliable investment due to the underlying principles of supply and demand. The global population is expected to increase by more than 2 billion people by 2050. In developing countries, as greater numbers of people rise from poverty to the middle class, diets will improve and people will consume more meat and protein. It’s estimated that crop production will need to increase by up to 70% to meet the resulting agricultural demand.

At the same time, supply constraints are making these demands especially difficult to meet. The number of farms in the United States continues to decline, a result of both development and the growing climate emergency. The Food and Agriculture Organization of the United Nations anticipates 250 million crop production acres will be lost by 2050, and an estimated 135 million people around the world will be displaced by 2045 as a result of land degradation. The changing climate is not only depleting Earth’s natural resources but is also shifting growing seasons, rainfall patterns, and crop habitats – presenting a new set of challenges for farmers.

As final numbers for 2021 show, gross cash farmland income was higher in 2021 than 2020, the largest year-over-year cash flow growth since 2014. Net farm income increased from 23%, or $22 billion, from 2020 to 2021, the largest year-over-year growth in almost a decade. Farmland valuations also experienced year-over-year double-digit growth during 2021 in many areas around the United States. Cropland also appreciated in value 7.8% in 2021, with Nebraska experiencing the nation’s largest growth.

Farmland has delivered strong absolute returns over the last 50 years; since 1992, returns to farmland averaged 10.85%, outpacing gold, real estate, and the S&P during this same time frame. Compared to many popular assets, farmland also offers investors historically low volatility. Between 1992 and 2020, the NCREIF Farmland Index had a standard deviation of 6.9%. In comparison, the volatility of the S&P 500 was 17.1% and privately owned real estate was 7.4%. Farmland’s favorable risk-adjusted return and historically low correlation to most other investments have provided investors with strong portfolio diversification for decades.

Another major advantage of farmland is that it provides investors with an effective hedge against rising inflation; the value of US farmland has historically been about 70% correlated with the CPI. Because of their intrinsic, useful nature, real assets tend to hold value better than soft assets, like stocks or bonds, in response to inflation. Farmland’s decreasing supply, coupled with the constant demand for food, makes the asset particularly well suited to maintain its value no matter the economic environment. This characteristic of farmland is especially relevant today and has resulted in renewed investor interest for those seeking a hedge against inflation.

From an impact investing perspective, farmland offers investors a unique play. As farmers navigate a changing climate amid a growing global population, many are turning to sustainable agriculture. By directly investing in farmland, individuals can provide outside capital to farmers in order to increase sustainability and improve their operations – while also mitigating the impacts of climate change. Sustainably managing farmland will also reinforce the land’s value over time, meaning better returns for investors long-term.

Historically, farmland has been out of reach for all but a handful of institutions and the ultra-wealthy, like Bill Gates. The market lacked transparency, had high minimums, and, often, required a farming background. Thankfully, there are now more ways than ever to get invested in the asset class. With a historically strong financial performance and real potential to impact climate change, farmland investments have the opportunity to make lasting financial and environmental impacts.