Bare farmlands refer to parcels of land that are currently not being used for any agricultural or commercial purposes but have the potential to be developed into productive farmland. These lands are typically located in rural areas and may require additional investments in infrastructure and equipment to become profitable.
In recent years, there has been a growing interest among investors in bare farmland as an alternative asset class, due to its potential for long-term capital appreciation and diversification benefits. However, investing in bare farmland also entails significant risks and considerations that need to be carefully evaluated.
The purpose of this article is to explore whether bare farmlands are a viable investment option and to provide insights into the benefits and risks of investing in this asset class.
Let’s begin.
Benefits of investing in bare farmlands
Investing in bare farmlands can offer investors a unique opportunity to diversify their portfolios, generate long-term capital appreciation, and own tangible assets with the potential for additional income streams.
Here are some of the other benefits of investing in bare farmlands:
Potential for long-term capital appreciation: Bare farmland can be a valuable investment due to its potential to appreciate in value over time. The value of farmland can increase as demand for food and other agricultural products grows, and as land becomes scarcer due to urbanization and other factors.
According to the National Council of Real Estate Investment Fiduciaries (NCREIF), farmland has generated average annual returns of around 12% over the past decade, outperforming other asset classes such as stocks and bonds.
Diversification from other asset classes: Investing in bare farmland can provide diversification benefits, as it is not directly tied to the performance of other asset classes such as stocks or bonds. This can help investors reduce overall portfolio risk and potentially improve returns over the long term.
Tangible asset ownership: Investing in bare farmland allows investors to own a tangible asset that can potentially generate income through leasing or farming. Unlike stocks or bonds, farmland provides a physical presence that can be seen and touched. This can also provide a sense of security and stability for investors.
Opportunities for leasing or farming the land: Bare farmland can provide opportunities for leasing or farming the land, generating income for investors. For example, an investor can lease the land to a farmer or farming company, earning rental income. Alternatively, the investor can farm the land themselves, either through their own labor or by contracting with a farming company.
For instance, Harvard University’s endowment fund owns several farms in California that are leased to organic farming companies, generating steady rental income.
Risks of investing in bare farmlands
When considering investing in bare farmland, there are several risks that investors should be aware of. It’s important for investors to carefully evaluate these risks before making a decision to invest in bare farmland.
Let’s explore some of the risks of investing in bare farmlands,
The volatility of commodity prices: The price of crops can be highly volatile due to factors such as weather conditions, supply and demand, government policies, and global trade. A sudden drop in commodity prices can significantly impact the profitability of farmland investments.
In 2020, the COVID-19 pandemic disrupted global supply chains and reduced demand for certain crops, leading to a decrease in commodity prices. This affected the profitability of many farmers and farmland investors, especially those who were heavily invested in affected crops.
Unpredictable weather patterns and natural disasters: Weather conditions such as droughts, floods, and hurricanes can significantly impact the productivity and profitability of farmland investments. Climate change also increases the likelihood of extreme weather events and long-term shifts in agricultural production patterns.
In 2019, severe flooding in the Midwest region of the United States caused significant damage to farmland and crops, resulting in estimated losses of over $3 billion.
Land management and upkeep expenses: Investing in bare farmland requires ongoing expenses for land management and upkeep, such as soil testing, fertilization, pest control, and equipment maintenance. These expenses can vary significantly depending on the location, soil quality, and type of crops being grown.
Difficulty in finding suitable tenants or buyers: Farmland investments may require finding suitable tenants or buyers to generate income or realize capital gains. This can be challenging in some regions, especially if the land is not located near urban centers or lacks suitable infrastructure.
For example, investors in farmland located in remote areas of the Midwest or West may face difficulty finding suitable tenants or buyers, especially if they are not familiar with the local agricultural markets.
Factors to consider when evaluating a potential investment in bare farmlands
Soil quality and suitability for agriculture: The quality of the soil and its suitability for different types of crops is a crucial factor in determining the potential productivity and profitability of farmland investment. Investors should consider factors such as soil type, depth, pH, drainage, and nutrient content to assess the suitability of the land for agriculture.
Location and proximity to markets and transportation: The location of the farmland can significantly impact its value and potential profitability. Investors should consider factors such as proximity to markets and transportation infrastructure, as well as local demand for agricultural products when evaluating a potential investment.
Access to major highways, ports, and railroads can also facilitate transportation and reduce shipping costs, which can improve the profitability of the investment.
Access to utilities and infrastructure: Access to utilities such as water, electricity, and telecommunications is essential for running and maintaining a farm. Investors should evaluate the availability and reliability of these utilities before investing in a farmland property. In addition, the presence of other infrastructure such as irrigation systems, buildings, and fences can impact the potential productivity and profitability of the land.
Legal considerations, such as zoning and land use regulations: Farmland investments are subject to a range of legal considerations, including zoning regulations, land use restrictions, and environmental regulations. Investors should carefully evaluate the legal and regulatory landscape of the area where the farmland is located to ensure compliance with all applicable laws and regulations.
In addition, investors should consider any potential risks and liabilities associated with land use, such as liability for environmental contamination.
Expert opinions and industry trends
Many agricultural and financial experts believe that bare farmland can be a viable long-term investment option, particularly for individuals looking to diversify their portfolios. According to a 2020 report by the US Department of Agriculture, farmland values have increased steadily over the past decade, with an average annual growth rate of 3.3%.
Experts note that farmland investments can provide stable returns, especially in the face of economic downturns and stock market volatility. However, experts also caution that investing in bare farmland requires significant research and due diligence to mitigate risks and ensure profitability.
The demand for farmland investments has also been on the rise in recent years, driven by a combination of factors including population growth, increasing demand for food and biofuels, and low interest rates.
According to a report by Farmland Investor Center, institutional investors such as pension funds and endowments are increasingly allocating capital to farmland investments, with the amount of institutional capital invested in farmland increasing from $3.4 billion in 2007 to over $30 billion in 2020.
Additionally, there has been a growing trend of farmland being purchased by non-farm investors, including high-net-worth individuals and private equity firms. However, this trend has also led to concerns about farmland consolidation and the impact on smaller-scale farmers and rural communities.
Conclusion
Overall, bare farmlands can be a good investment option for individuals who are willing to take a long-term approach and are prepared to manage the risks involved.
It’s important to conduct thorough research and seek advice from industry experts before making any investment decisions.
By doing so, investors can make informed choices that align with their financial goals and risk tolerance.