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Farmland as an Inflationary Hedge – What Types of Agriculture Production Should be Considered?

June 10, 2024 - Adam Woiblet

As inflation rates continue to rise in the United States, investors have renewed interest in alternative investment opportunities that can outperform traditional asset classes without sacrificing stability. In 2021, The Land Report named Bill Gates as the top private farmland owner in America, since then investors of all sizes and backgrounds have flocked to the agricultural sector.

Owning farmland allows an investor to potentially generate income from three sources: operations and crop yields, lease payments, and capital gains when a property is sold. According to the USDA Economic Research Service, farmland values have risen yearly since 1988, except for two years (2009 and 2016). At the same time, the United Nations reports that by 2050, the world will need to increase its food production by over 50 percent to feed the global population.

Farmland investments have remained relatively untapped due to a lack of familiarity and perceived barriers to entry. Also, regional farmland real estate values vary widely because of differences in general economic conditions, government policy, and local geographic conditions that affect returns to producers. To take the guesswork out of understanding the different types of agricultural opportunities available, we have briefly summarized each of the types of agricultural assets and production found throughout the nation.

Dryland versus Irrigated Farmland – As the name implies, dryland farm ground crops are irrigated via precipitation found in the local environment. Dryland farms can have a wide range of crop yields from year to year depending on weather patterns local to the area where the farm is located. Dryland farms do provide potential benefits to absentee-type investors in the form of very low to no equipment capital expenditure liability after purchase and a relatively simple farm operation.

In contrast, irrigated farm ground has an outside source of irrigation water in addition to the local precipitation. The water source can be surface water from rivers, lakes, and creeks or ground right from local wells. Irrigated farm ground operators have more control over the amount of water a crop receives which typically leads to a more diverse range of crops available to be grown and increased control over pest management. Typically, irrigated farms will have expensive irrigation equipment onsite which must be maintained and/or replaced and this creates some capital expenditure exposure to a potential landowner. However, this exposure is usually offset by increased rental rates and income the farm is able to produce as a return on investment.

Permanent Crops - Permanent crops have a multi-year lifecycle on the farm after development and establishment. A few examples of these crops include apple and fruit trees in the Pacific Northwest, almonds and wine grape vineyards in the Southwest, blueberries in the upper Midwest, and citrus groves in the Southeast. Development of a permanent crop farm can be quite expensive, and it can take several years before the crop reaches maturity and full production. These types of farms are typically irrigated and can require mitigation measures to ensure the effects of frost are minimized depending on their location. Return thresholds expected by investors in this sector are usually a bit higher than return expectations on other farm-based assets.

Vertically Integrated Assets – A vertically integrated agricultural asset will usually consist of a farm ground component, a downstream handling, and a sorting or processing component that takes the raw produce from the farm and turns it into a retail-ready product, and finally may include a marketing arm that sells the product to distributors or grocery stores. This type of agribusiness can be a relatively small, on-farm family-run operation up to very large corporate companies consisting of a billion-dollar operations. Investment in this type of agricultural asset requires a deep knowledge of the operation and commitment to ownership in an operating business in addition to farmland.

Livestock – Livestock operations usually involve ownership of ranch-type properties used for grazing, feedlots, and finishing operations, or dairies, in addition to the animals. An agribusiness of this type is very specialized and can be considered a lifestyle if an owner intends to be personally involved in the operation. With many types of livestock being raised throughout the nation, an operation of this type can be found in most states. The size of the operation, the local jurisdiction and regulations, and transportation costs to major markets should all be considered when determining if investment in this sector is a good choice.

Our team of land and agribusiness professionals holds real estate brokerage licenses in 30 states and, as a result, can deliver personalized sale, merger, and acquisition services in every major agricultural market throughout the nation. Our professionals are experienced in working with landowners, farmers, institutional investors, and family offices to achieve industry-best outcomes. Contact us today so that we can turn your dreams into reality!