What Is an Investment Farm?
The term investment farm refers to an agricultural business operation that is purchased and operated for financial gain. The intention of investing in a farm may be to generate a profit or to create a tax deduction for the owner. Investment farms are owned by institutional investors who generally don't live on the farm or take part in any of the day-to-day operations. As such, the investor generally hires 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.
- Farm investors hire employees for the day-to-day operations rather than participating themselves.
- The majority of these investors are institutional, including pension funds, endowments, and family offices,
- Many investors consider agriculture to be a recession-proof business since food is a necessity.
- Some investors look to alternative ownership patterns because they are cheaper and less risky than direct ownership.
How Investment Farms Work
Farming is part of the agricultural industry, It involves any activity that individuals and corporations undertake to work the land. This includes producing food, raising livestock, and growing other crops. Farming can be someone's primary livelihood or it can be an investment. Unlike regular farming operations, investment farm owners don't take part in any of the day-to-day operations associated with the project. Many of these investors include pension funds, endowments, and family offices,
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 can be used in many industries. For instance, soybeans may be:
- Processed for oil
- Serve as animal feed
- Processed into food products
- 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 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.
The total annual return for the Farmland Index as of the end of the first quarter of 2022. The index, created by the National Council of Real Estate Investment Fiduciaries, measures quarterly returns of investment farms and farmland in the private market that are held by tax-exempt institutional investors.
The U.S. Department of Agriculture (USDA) regularly compiles data on farms and farmland across the country. As much as 96% of the country's farms were family-owned in 2017—3% of which were large-scale operations. That's a small number, but consider the fact that these large farms produced almost half of the nation's agricultural products.
The agency recorded farm totals in 2017 across the United States as:
- 1.8 million: Small family farms
- 108,304: Mid-sized family farms
- 52,592: Large and very large family farms
Investment farms are part of the agribusiness industry. Agribusiness is the business sector encompassing farming and farming-related commercial activities.
Investing in Investment Farms
Many investors often consider agricultural investments to be recession-proof because food is a universal necessity. As such, there will always be a need for farms and farmers. But jumping in can be complicated and requires a great deal of planning. Investors may believe buying a farm and renting it out to a farming operation is all there is to it. The sheer scale of farming, though, is a capital-intensive commitment, which involves costs like property, operational expenses, and equipment.
Agricultural investors may look to the alternative ownership patterns of forming a partnership rather than owning the farmland outright. There are more than 440 funds that invest in food and agriculture, managing more than $73 billion in assets as of 2017. Investors may want to consider real estate investment trusts (REITs). 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 who buy shares gain several advantages over buying farmland themselves. Here are some of the most common:
- The 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 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.