Farmland is valuable, but fund investors find it difficult to buy
invoice Gates bought huge areas of arable land. Warren E. Buffett acquired a 400 acre farm in Nebraska in the 1980s that produced corn and soybeansSpice that this investment in agriculture “had no disadvantages and potentially had significant advantages”.
This logic may seem tempting. But can investors in mutual funds or exchange traded funds follow Gates and Buffett’s lead? Yes, but only indirectly, unless you buy corn fields or cow pastures yourself. No mutual fund or ETF owns all land.
Instead, funds and ETFs hold the stocks of agribusiness companies like Deere & Company and Archer-Daniels-Midland or buy futures contracts for commodities like corn, soybeans and wheat.
The investment case for arable land – and thus for a fund that could be representative of it – boils down to two words: scarcity and necessity. Farmland is limited – less than a fifth of the area in the United States is suitable for agriculture – and food is essential. If everyone doesn’t hunt and gather, the world needs farms.
And farmland has grown in value over the long term. The U.S. Department of Agriculture says that Average price for an acre of US farmland has increased by 75 percent in the last 15 years.
Among the funds and ETFs that invest exclusively in agricultural stocks, the oldest and largest is the VanEck Agribusiness ETF It is an indexed offering that passively holds 54 stocks in companies ranging from agricultural machinery to aquaculture.
It invests worldwide, but about 60 percent of its holdings are in the United States. In the decade that ended in September, it achieved an annual average of 9.7 percent.
Brandon Rakszawski, director of ETF product development at VanEck, said the ETF does not aim to replicate ownership of farmland, but rather reflects the investment theme of “a growing population and the need to feed more and more people”.
Because the fund holds stocks, its movements follow those of the stock market: its returns correlate roughly 90 percent with the S&P 500. This means it would offer little additional diversification for someone who already owns a lot of large-cap US stocks.
Farmland, on the other hand, has little correlation with the stock market, so an analysis by Todd H. Kuethe, an agricultural economist at Purdue University. So, owning agricultural land could add diversification to a stock portfolio as land value could fluctuate when the market fluctuated.
Another way a fund investor can take advantage of some of the benefits of farmland is through a commodities ETF like this Invesco DB Agricultural Fund. This indexed offering buys commodity futures for a wide range of agricultural products, as diverse as coffee and cotton. Futures are contracts that oblige someone to buy or sell goods at an agreed price and date.
Jason Bloom, head of Fixed Income and Alternatives ETFs at Invesco, described the fund as “a fair, if imperfect, proxy” for owning farmland. Crop prices determine the value of commodity futures and create an indirect link between the value of the fund and that of the farmland, he said.
The fund has lost an average of 4 percent a year over the past decade, although it has recently recovered and is down 19 percent since the start of the year.
Ben Johnson, Director of Global ETF Research at Morningstar, said he wasn’t surprised that agricultural funds couldn’t truly replicate the investment benefits of land ownership.
Funds and ETFs “give you exposure to a diverse basket of securities,” he said. “But will these correlate well with the values of farmland? In all likelihood not because they expose you to the producers’ incomes, not the land they own. “
Someone willing to move beyond funds and ETFs has other ways to try and turn dirt into dollars.
A variety of investment vehicles own farmland or help finance it. These instruments can be riskier than large funds because they are less diversified.
Several publicly traded real estate investment trusts (REITs) Keep farmland. Paul A. Pittman, Chairman and CEO of Farmland partner, a Denver-based REIT, said global trends – the scarcity of farmland and growing demand for food – make his company’s holdings valuable.
Farmland is analogous to an “inflation-linked bond,” he said. The rent paid by the farmers produces a bond-like stream of cash, and these payments, as well as the underlying value of the land, have kept pace with inflation.
Mr. Pittman grew up in a farming family in Illinois and began buying land there while working as a lawyer and investment banker. He eventually poured much of that property into Farmland Partners, which went public in 2014.
Today the REIT owns more than 150,000 acres in 16 states. Over the past five years, the share has returned an annual average of 5.2 percent.
New online outfits have also emerged to accelerate farm investments. They are aimed at discerning investors as they are not registered and regulated like mutual funds and ETFs.
Like Mr. Pittman, Carter Malloy started his company AcreTrader in Fayetteville, Ark. after buying farmland himself. The complexity of the process had frustrated him.
“That was difficult and expensive,” he says. “There is no multiple listing service for arable land, and you need regional know-how.”
He said AcreTrader aims to make purchases easier by valuing farmland and allowing people to buy partial ownership of farms. “For us, the goal is to democratize the asset class and bring investments into rural areas.”
Every AcreTrader deal has a minimum investment – the most recent minimums have been anywhere from $ 8,800 to $ 40,000 – and customers often buy multiple, Mr Malloy said.
The easiest way to invest in farmland can be the most original: buy a property yourself.
Prices vary by size and location, but Purdue Professor Kuethe said $ 800,000 to $ 1 million could be typical. Buyers are often seasoned farmers looking to expand or people who grew up on or near farms.
Annie McCauley and her husband Kirk teamed up with close friends to buy a farm in Uniontown, Ohio, next to their home. Ms. McCauley is a financial advisor with Sequoia Financial Group in Akron, Ohio. She initially saw the purchase as an investment and assumed that the land would be leased to a local farmer. But Mr. McCauley, a business owner whose family owns a dairy farm in Ohio, wanted to run it.
The McCauleys and their two sons often spend weekends on the farm, planting, tending and harvesting soybeans, hay and alfalfa. That brings immaterial advantages.
“If we had leased the land to another farmer, the farm’s cash flow would have been positive earlier because we didn’t have to invest in equipment – tractors, balers,” said McCauley. “But that would also have diminished the joy you get when you grow it yourself.”
A long-term investment in a REIT, ETF, or mutual fund simply cannot deliver that kind of practical satisfaction. On the other hand, you may thrive while others are working the land, and that too can be a certain joy.