Many of us have heard this old chestnut, usually attributed to Mark Twain: “Buy land, they’re not making it anymore.”
A number of America’s richest people understand this, and are now among the country’s largest landholders. The list includes Jeff Bezos, the Ford family, Dr. Peter Buck (co-founder of Subway), Ted Turner, John Malone, and Bill Gates. Gates, in fact, is considered to be the largest private owner of farmland in the country, with some 269,000 acres spread across dozens of states. This is according to the Land Report 100, an annual survey of the nation’s largest landowners.
Yes, farmland—one of the investments Wall Street loves to hate. Yet, it may be one of the best investments out there. Let me explain why…
Farmland is a real (physical) asset. In today’s unsettled and rapidly changing macroeconomic environment—especially as inflation remains elevated—investors should look to farmland for stable returns and protection against inflation.
Farmland has again proven its inflation-hedging ability over the past two years, thanks to its ability to produce positive inflation-adjusted real returns as inflation has risen. Annual inflation in the United States averaged 6.8% over the past two years, quadrupling the previous 10-year average inflation rate of 1.7%.
The chart below shows that U.S. farmland, as represented by the National Council of Real Estate Investment Fiduciaries (NCREIF) Farmland Index, generated positive and increasing total returns during 2021 and 2022. In comparison, other asset classes saw considerable performance swings during the same period, generating negative nominal returns in 2022, a year of tightened monetary policies and elevated inflation.
Farmland beats inflation because the crops produced usually rise in price more than the costs of the inputs required to produce them.
For example, total production expenses increased 19% for U.S. farmers from 2021 to 2022. However, prices of farm products also increased. From March 2021 to December 2022, the overall price of farm-grown and farm-raised products increased more than 40%!
This ability of the price of farm goods to more than offset higher production costs encouraged farmers to continue growing crops. The combination of higher prices and stable output led to record-setting total U.S. farm revenue in 2022, despite multi-decade high inflation rates.
Farmland Offers Stability
In addition to inflation hedging, another key attribute for investing in farmland is its ability to preserve value. Unlike other asset classes whose value may depreciate over time, land-based natural asset classes, such as farmland, retain their value, because it is a tangible and productive asset that meets a basic need and can generate income through agricultural activities—regardless of the economic environment.
Farmland investments offer a valuable source of stability for investors. Just look at the chart below, which shows that U.S. farmland values have steadily increased, with land values appreciating in all but seven years over the past five-plus decades.
Farmland’s value-preserving ability makes it an attractive option for investors looking for a long-term, low-risk investment strategy. It has delivered investors positive returns without significant deviation.
The NCREIF Total Return Farmland Index has generated positive returns every year since its inception in 1991. The average gross return of the index has been approximately 11.5% over the last 25 years. Farmland has outperformed the S&P 500 by 120 basis points annually since 1991, while experiencing less than half of the S&P 500’s volatility.
The long-term outlook for farmland is robust.
The global population will likely reach 9.7 billion by 2050. That has led the United Nations and the World Bank to predict that a 50% increase in food production is required to meet the increased demand.
This will be difficult given that the amount of arable farmland worldwide continues to decline, as climate shifts and poor management practices degrade previously good farmland. Unsustainable farmland practices have contributed to significant soil degradation and will continue to do so, as 90% of the planet’s soil could experience degradation by 2050, according to an article in Agri Investor.
That’s why farmland values in the U.S. are increasing significantly, driving valuations 75% for the average acre of land in the past 15 years, according to the New York Times.
So how can you invest in farmland?
One great and direct way—if you have at least $10,000 to invest—is through AcreTrader, which buys farmland and timberland for investors.
If you don’t have as much money but are looking for steady income, the next best option is through an almost-unknown company, CHS Inc., the leading agribusiness cooperative in the U.S. CHS is owned by farmers and local cooperatives across the United States. It provides critical crop inputs, market access, and risk management services that help farmers feed the world. The company’s diversified agronomy, grains, foods, and energy businesses recorded revenues of $47.8 billion in fiscal year 2022.
However, you will not find its common stock trading anywhere—it doesn’t exist.
CHS uses proceeds from a series of preferred stocks to maintain a strong balance sheet and fuel growth. There are five classes of non-voting, callable (at $25 per share) preferred stock that provide capital for CHS:
- 8% Cumulative Redeemable Preferred Stock (CHSCP): current yield 6.69%, up 5.4% year-to-date
- Class B Cumulative Redeemable Preferred Stock, Series 1 (CHSCO): current yield 7.56%, up 1.8% year-to-date
- Class B Cumulative Redeemable Preferred Stock, Series 2 (CHSCN): current yield 7.00%, up 2.14% year-to-date
- Class B Cumulative Redeemable Preferred Stock, Series 3 (CHSCM): current yield 6.70%, up 2.07% year-to-date
- Class B Cumulative Redeemable Preferred Stock, Series 4 (CHSCL): current yield 7.22%, unchanged year-to-date
All CHS classes of preferred stock trade on the NASDAQ Global Select Market. Dividends, as declared by the company’s board of directors, are paid on a quarterly basis at a constant rate.
While you’ll get little of the appreciation from the farmland, the income here on these preferred stocks is rock steady, no matter what the stock market does. This makes them solid buys for income investors.