Why invest in farmland?
The world's population is at 7.9 billion as of the writing of this article, with approximately 1 billion of those people already going hungry. The UN estimates the world will have another 2 billion people by 2050. Overall, the world will require a 60% increase in our food supply in order for everyone to have enough.
This increase in food demand is also driven by the world’s increasing middle class, which tend to demand more foods rich in meat and dairy. Then there are Biofuels, which burn crop calories; they don’t contribute to the global food supply and yet need to be grown on farmland.
Food chain inefficiencies
It isn't just a simple lack of enough food that results in people going hungry. There's also another major issue - food chain inefficiencies. Hunger exists today in the world for 1 billion people, despite there technically being enough food for all. A lot of food goes to waste due to not being consumed before rotting, being deemed not attractive enough for sale or due to being intentionally destroyed in order to keep prices high.
Thus, making sure a higher percentage of food makes it to people's plates will be a key important factor. Whoever owns the farmland has enormous potential to increase the profitability of the land by increasing food chain efficiencies. This is an immensely powerful position to be in.
We have seen food price inflation hit 7% in the U.S., the highest increase in over 20 years. This highlights how demand is outpacing supply.
Source: Trading Economics
Approximately one third of all the food in the world produced for human consumption every year (1.3 billion tonnes) is wasted or lost.
In developing countries, food waste can be reduced primarily by improving infrastructure and increasing investments in production, harvesting and storage.
Some may find it surprising that food waste is an even bigger problem in developed nations, with many producers, retailers and consumers throwing away edible food. This waste is about 115 kilograms per capita each year in North America. To show the vast difference, in sub-Saharan Africa and Southeast Asia, consumers only throw away six to 11 kilograms per capita per year.
Buffett and Gates are betting the farm
Value investors such as Warren Buffett (Trades, Portfolio) have stated in many past interviews that farmland is a great investment. This may seem surprising given the typically lackluster returns for farmland investors, but many people don't know that Buffett’s son, Howard Buffett, is a farmer and runs a working farm! In the long term, farmland is about as low-risk as investments come.
Bill Gates (Trades, Portfolio) is also a major bull on farmland and is now the largest private farmland owner in the U.S. Gates' charitable foundation also owns a few farmland-related stocks such as Deere & Co (DE, Financial) and Caterpillar (CAT, Financial), which both manufacture agricultural machinery.
According to the U.S. Department of Agriculture, the U.S. farm real estate value, a measurement of the value of all land and buildings on farms, averaged $3,380 per acre for 2021, up $220 per acre, or 7.0%, from 2020. This is a sharp increase from the growth rate in prior years of approximately 4.5%.
Best farmland REITs
Let's face it, it's not practical for most retail investors to go out and buy swathes of farmland like Gates. For those who don't have the time, inclination or capital required for this difficult business venture, a great way of investing in farmland is via Real Estate Investment Trusts (REITs). REITs are companies that own land and rent it out to tenants. By law, REITs must pay out at least 90% of their taxable profits to investors as a juicy dividend payment.
Farmland REITs are a classic defensive investment which should perform well in a variety of economic cycles. They also have the potential to “harvest” extra returns on the capital appreciation.
1. Gladstone Land
Gladstone Land (LAND, Financial) owns 115 farms on 90,000 acres of land across the U.S. This land is diversified across 10 different states with an incredible 100% occupancy rate.
Gladstone pays out monthly dividends with a current dividend yield of 2.56%. Historically, the shares price of this REIT has also appreciated well. In addition, the REIT has recently acquired a citrus grove in South Florida.
2. Farmland Partners
Farmland Partners (FPI, Financial) is 30% smaller than Gladstone and has a small market cap of approximately $400 million. The REIT went public in 2014, and today it has over 150,000 acres of land, mostly in the corn belt, the Southeast and California.
Equity REITs or Debt REITs
Equity REITs pool their cash to purchase entire farmland sections and then rent them out to tenants (in this case farmers). This will probably be the more suitable investment for most, but for those who like to invest in debt, there are debt REITs that make loans to farmers, which they can use to purchase extra land or expand their operations.
