Why farmland is still a good investment

Why farmland is still a good investment

When we talk about rented farmland, we are more than likely talking about land that is owned by what is known as a non-operator landlord. A non-operator landlord is a person who owns the farmland but does not actively do the work of farming. They reach an agreement with a tenant farmer who does that work for them.

And, believe it or not, the landowner and tenant farmer relationship is quite common in agriculture. One of the reasons for this is because farmland is seen as a worthwhile investment by many investors.

If you are new to the thought of investing in farmland, then you may want to know whether it truly is an investment worth looking into. In our opinion, of course, is a resounding yes.

But don’t just take our word for it. Here is why we – and others in the agriculture industry – believe farmland is still a good investment.

Farmland leased by non-operator owners is common in the U.S.

The latest data on farmland ownership from the U.S. Department of Agriculture (USDA) shows that about 39% of the farmland in the lower 48 states is rented. In fact, more than half of land used for growing crops is rented.

Also, of that rented farmland, 80% of it is owned by non-operator landlords who then have a tenant farmer run the farming operation for them.

In Iowa, investors are common farmland owners

Taking a look at a more local level, investors are common owners of farmland here in Iowa.

According to the latest Farmland Value Survey published by Iowa State University Extension and Outreach, investors are active in buying Iowa farmland. The most recent data shows that investors were buyers in 22% of land sales during the survey period.

Why investors buy farmland

But why do investors buy farmland? Well, because it’s seen as an investment that offers several benefits.

First, it generates plenty of return on investment (ROI), especially when the farm operations are successful. Those returns most often come in two forms – the continued increase in farmland values that pay off when the time comes to sell and revenue generated through crop yields or cash rental payments.

Let’s dive into those returns a little further. Million Acres reports that during the past 50 years, farmland in the U.S. has increased in value by close to 6.1% per year. There have also been a mere five down years during that period.

It’s also important to consider that farmland has generated positive returns in every year since 1991 – an average annual return of 11.5% per the USDA.

Then there is the fact that land values have been relatively stable when compared to other more traditional types of assets that investors commonly seek out.

While most investors are familiar with all the ins and outs of the stock market, they may not know that land can actually be a more stable investment with even better returns than stocks. Per a report from Harvest Returns, the annual return from farmland averages a healthy 11.5% over the past 25 years. That is compared to a 6% to 7% return on stocks. It should be noted, though, that a return like that on stocks still requires a long-term strategy.

Finally, land is a finite resource with only a certain level of supply – but the demand for foods and products produced by farmers is not going to go away.

All of these factors contribute to the one of farmland’s best qualities for investors – it fits in just about any investment portfolio. It can work well alongside any other plan. Why? Because it’s an investment that is not as susceptible to inflation and the highs and lows of farmland often trend in the opposite direction of other more conventional equity investments, according to Forbes.

Trends point toward increased interest in land investments

That demand for land is not going to go away, per some experts. Auction prices for farmland in several states ended 2020 on a strong note and have entered 2021 in good shape, as well.

With an increase in demand, prices for high-quality land – specifically cropland is also up. Those strong prices, according to an article in Beef Magazine, are currently being supported by low interest rates, a lower supply of available land and a good demand for cropland across the country as a whole. That demand is also expected to continue from both investors and farmers.

This is all obviously good news for those who are current owners of land.

How to get started investing in land

Farmland can be somewhat more difficult for investors not already connected to agriculture to break into. But there are ways to get your foot in the door and start investing in farmland.

For one, it’s always a possibility to buy land directly once it is up for sale or auction. After a purchase has been made, you can establish a lease agreement with a tenant farmer who will actually farm the land.

Another strategy that many investors use is to purchase an existing farm and then lease the land back to the current farmer. This involves less risk than a situation where an investor buys inactive farmland – or land that has not been used for agriculture purposes – and must put in the work to find a tenant or get land ready for production.

We are farm real estate experts

Midwest Land Management and Real Estate, Inc. boasts a team of experts in farm real estate matters. Our territory covers Iowa, Minnesota and South Dakota and we hold real estate brokers licenses in each of those states. From auctions to sales, we can help any type of buyer – investor or farmer – acquire land that is suitable to their needs and future goals.

We would appreciate the opportunity to help you meet your own unique goals. Contact us today to learn more about the land acquisition services offered by our team of experts.