From George Soros to TIAA-CREF and Harvard University, it seems that everyone is snapping up farmland these days. As of April 2014, hedge funds have over $14 billion invested in farmland, and do not show signs of slowing down. Farmland can be an incredibly stable and lucrative way to make money, but it isn’t without risk. Unpack the risks and rewards of investing in something as ancient as agriculture in the 21st century.
Financiers follow the money, and increasingly traditional avenues of making money are falling short. Bloomberg tracked prices from January 2008 to April 2011, a time span remembered primarily for the economic collapse. It also happens to represent the time span that ag investment firm Ceres Partners launched and grew their initial holdings. By April 2011, Ceres Partners owned 61 farms valued at a total of $63.3 million. Between January 2008 and April 2011, Standard & Poor’s GSCI Agriculture Index grew at an average of 5.3 percent per year. In contrast, the S&P 500 Index dropped by nearly 1 percent per year.
As the New York Times reports, the national net farm income was projected to set a new record high of $130.5 billion for 2013, performing somewhat less well in 2014 at around $95.8 billion. These numbers continue to keep interest focused on farmland. Increasingly, hedge fund managers and investment brokers are fielding phone calls from individuals and businesses that want to get in on the action.
How Farmland Makes Money
As an investment, farmland returns money through two channels. Most industrial-owned farmland is rented out to tenant farmers, who pay a price per acre of land. Indeed, rental income accounts for most of the revenue in agriculture. Farmland also returns money through land appreciation. The price per acre of farmland has risen steadily from $737 to $2,900 between 1980 and 2013. Simply holding on to the land earns money over time.
Economists believe that farmland is a lucrative investment in a world that’s growing ever-larger. People will always need to have food, after all. A booming population and greater affluence in Asian giants like India and China means that more consumers will be able to expand their food budgets. Farms will need to produce more high-value crops to meet this demand.
Since the population growth shows no sign of slowing down, farmland seems like a solid bet to investors looking for a sure thing. But is it?
Farmers have long memories, and most remember the 1980s, when a market crash sent farm prices plummeting. States like Michigan did not recover from the crash until 1987. Some investors feel that the market is headed for another crash.
Some fear that the rising price suggests a farmland bubble. When the bubble bursts, who will be left holding the bag? Still others disagree and feel that investors are too quickly spooked after dot-com crashes and housing market crashes. Perhaps investors are becoming conditioned to crashes as inevitable corrections to the market. That does not mean that an agriculture crash is inevitable or forthcoming.
Farmers are also quick to note that the hedge fund investment represents only a small percentage of farmland ownership. Most farms are still owned privately, with institutional investors accounting for less than 1 percent of farmland owners, Philippe de Lapérouse, managing director of an agriculture consulting firm, told the New York Times. Hedge funds would need to invest in farmland on a much greater scale to be able to exert more control in the long run.
Talk to your investment broker or hedge fund manager about farmland investment. You’re probably not the only one looking to learn more about this niche.