What Is an Investment Farm?
An investment farm is an agricultural business operation that is purchased and operated with the intention of making a profit, or with the goal of creating a tax deduction for the owner. Agribusiness is the business sector encompassing farming and farming-related commercial activities.
Investment farms are owned by investors who typically do not live on the farm or take part in any day-to-day operations. The investor will generally hire farmhands and other employees to do the actual farming.
- An investment farm is an agricultural business operation used to make profits or to take advantage of tax deductions.
- Investors in farms, which include pension funds, endowments, and family offices, do not participate in the daily activities of running a farm or the business and hire employees for the task.
- Some investors look to alternative ownership patterns, such as REITs, because they are cheaper and less risky as compared to direct ownership.
Understanding Investment Farm
Many investment farms exist as commercial farming businesses that grow cash crops that sell in the commodities markets. Commodity or cash crops include soybeans, corn, wheat, cotton, and livestock such as cattle and hogs. Cash crops find uses in many industries.
As an example, soybeans may be processed for oil, serve as an animal feed, is processed into food products, and used in the plastics, rubber, and paper industries as a filler. Some cash crops are grown for biofuel purposes. Biofuel is a type of energy derived from renewable plant and animal materials. Examples of biofuels include ethanol, often made from corn in the United States, and from sugarcane in Brazil.
Returns from investment farms are dependent on prices for agricultural commodities in markets. The higher the prices for commodities, the greater the profits for investment farms. Such farms attracted rapid capital from institutional investors between 2000 to 2014 but witnessed a sharp decline in inflows following a drop in agricultural commodity prices that year.
Investing in Investment Farming
Because food is a universal need, some investors consider agricultural investments to be a recession-proof investment. When it comes to investing in farmland the increasing scale of farming operations merely means buying a farm and attempting to rent it to a farming operation can be a capital-intensive commitment. Considerations include the cost of the property, operational expenses, and equipment costs.
The National Council of Real Estate Investment Fiduciaries is a Chicago-based organization that created a farmland index to measure quarterly time-series return measure of investment performance of a large pool of individual agricultural properties between 1992 and 2016. According to this index, returns on farmland investments peaked during the fourth quarter of 2005.
Agricultural investors may look to the alternative ownership patterns of forming a partnership rather than outright owning the farmland. Another alternative is to invest in a real estate investment trust (REIT). Farmland REITs, such as Farmland Partners and Gladstone Land Corporation, purchase agricultural land and handle the process of leasing it to farmers.
Because REITs typically deal in portfolios of properties, investors purchasing shares gain several advantages over buying farmland themselves.
- Capital required to invest in a REIT can be as low as the price of a single share. This low-cost spreads the money at risk in any given farming operation across multiple investors, reducing the risk to any individual shareholder.
- The presence of multiple farms in a portfolio offers diversification, giving investors broader exposure to the production of different commodities. This diversification serves to offset some of the riskier elements involved in owning a single farm.
- Shares in a REIT usually trade on stock exchanges, making them significantly more accessible to buy and sell than agricultural real estate.
The Make-Up of Investment Farms
Since the mid-1930s, farms in the United States have grown increasingly large while at the same time, the total number of family farms fell. Statistics compiled by the U.S. Department of Agriculture (USDA) show that 99-percent of the farms in the country were family-run in 2015. These large, family-run operations account for 89 percent of the country’s agricultural production.
In the same year, non-family farms only produced 11-percent of the nation’s total agricultural output. These numbers suggest that, despite the decline in the abundance of family farms, large-scale investment farms still must compete with large-scale family farming operations for both land and labor.
Valor Advisors, a Miami-based financial advisory firm, estimates that the number of funds investing in agricultural real estate jumped to 440 in 2017 from 38 such funds in 2015. These investors comprised an eclectic cohort, from pension funds to family offices and endowments. Cumulatively, they were responsible for managing $73 billion in real estate assets.