When it comes to investing in farmland, it's essential to take the long-term approach. Farmland investments are typically held for the long term, as they are considered assets that appreciate over time. While there may be good years with great short-term returns, farmland investment is primarily a hold asset for the future.
In the stock market, investors usually aim for a 10% rate of return, according to sources like The Motley Fool. In contrast, most farmland investors expect a more modest 2.5% rate of return annually. The goal of farmland investment is to hold onto it because they are not making any more of it. Looking back, the average return on farmland has been around 12.5%, according to AcreTrader.
Short-term value of land investments
The short-term value of farmland is all about the money that can be made in the near future. Two key factors that determine short-term value are cash flow and crop production. The Midwest boasts excellent soil quality and favorable conditions for growing crops, enabling farmers to produce high yields.
However, these two factors can be influenced by various others. Fluctuating crop prices can impact farmers' earnings. Government policies, such as subsidies, regulations, and crop insurance also have an effect on farming profitability. This will become a bigger issue as we hear more about carbon credits, regenerative agriculture, and sustainability. Extreme weather events like droughts or floods can damage crops, leading to lower yields and a decline in farmland value in the short term. As we look across the Midwest, the “I” states have good moisture for the most part, but we are all praying for the right weather. What a gamble, but what a relief when we have a million-dollar rain.
Long-term value of land investments
The long-term value reflects the anticipated worth of farmland in the future. Over time, farmland tends to increase in value due to several reasons. In the past two years, we have seen significant appreciation around 42%. Farmland becomes scarcer as available land for farming diminishes, leading to further appreciation. As we look back a few years, we have seen the perfect storm: low interest rates; increased government payments related to covid, trade, and extreme weather; a rally in demand from China for grain; corn prices moving from $3.50 to $7, low supply, and a whole lot of equity. For example, in Iowa 83% of farms are paid for free and clear, according to research by Iowa State.
Furthermore, farmland serves as a long-term investment that helps protect against inflation. As general prices rise, the value of agricultural products tends to increase as well. Consequently, owning farmland can help maintain its value and serve as a safeguard against inflation.
As an auctioneer and real estate broker, I see some people want to sell farmland to invest in the stock market for a higher return. Conversely, I have seen people cash out their 401K to buy into the security of farmland at a lower short-term return. Balancing short-term and long-term values is crucial when making farmland investment decisions. Consider both the immediate profits that can be made and the potential for farmland to appreciate over time. Analyze current cash flow and crop yields to assess short-term profitability, taking into account factors such as crop prices, government policies, and weather patterns. It is equally important to evaluate the long-term prospects of the region, including population growth, infrastructure development, and the overall economy.
Successful land buyers also look for opportunities to improve the land, such as removing trees to create additional acres or implementing drainage systems to increase production. One thing that I see is that people invest in what they know. If you don’t live in the Midwest and you inherit a farm but know nothing about farming or farmland, you are more likely to sell and reinvest in what you know. If you live in the Midwest and have seen the annuity provided by a long-term hold of the asset you purchased years ago; arguably, you want to invest in more.
