The Fundamentals of Farmland Ownership
Is rural real estate a good investment?
The volatile economic climate of 2020 has many farmers, ranchers, and landowners looking to secure their financial portfolio with low-risk investments rather than gambling collateral on high-risk stakes. Through COVID-19, rural real estate has consistently stood out as an outlier compared to the ups and downs of commercial, residential, and stock market investments.
Source: Agricultural Survey- Second Quarter 2020. Federal Reserve Bank of Dallas (June 2020).
Irrigated and ranchlands have been on the steepest incline with drylands still holding steady. While the New York Stock Exchange experienced a 30 percent loss of value in March alone, the value of farmland slipped between two and three percent during the same time frame. There are several factors that have contributed to the ongoing stability of agricultural land including:
- Steady returns from multiple income revenue streams;
- The finite supply of rural land;
- The world’s dependency on agriculture; and
- Government incentives and conservation grant opportunities.
The Importance of American Farmlands
Although U.S. agriculture is an essential part of global trade and plays a vital role in maintaining food security, it’s at an increasing risk of endangerment through urbanization. From 1992 to 2012, 31 million acres of American farmlands were lost to urban development.
The American Farmland Trust has stated that 2,000 acres of farmlands on average are converted each day to residential and commercial properties. As rural land continues to shrink, land conservation becomes a higher priority for our nation. American farmland values continue to rise, but so does the importance of their existence. An investment in American farmland is an investment in the conservation of it, and a promise of a secure domestic food supply for the future.
Potential Income Sources from Farmland Investments
Rural land ownership isn’t only beneficial to farmers and ranchers. In fact, 31 percent of agricultural landowners are not farm operators themselves but rather rent or lease the land out for agricultural use.
Of the 911 million acres of U.S. farmland in 2014, more than 282 million acres were owned by non-operator landlords who collected the steady returns of farmland ownership without actually managing the operation. Returns from rural real estate investments typically fall into the following three categories:
1. Renting Out Land to Farm Operators
Unlike typical landlord and tenant relationships in residential real estate, most non-operating landlords of agricultural land have long-term relationships with tenants. An estimated 84 percent of rural land for lease has been rented to the same farmer tenant for more than 3 years and 41 percent for more than 10 years. These long-term lease structures provide more stability compared to the short-term rental agreements for residential properties, while also contributing to the important movement of land conservation and a secure domestic food supply.
2. Operating Your Own Farm
Many American farmers and ranchers choose farmland ownership over monthly rental fees. Agricultural land ownership also allows farmers to have more precise control over their property and products while allowing them to be eligible for additional revenue opportunities such as government subsidies and conservation grants.
American ranchers are more likely to own pasturelands over row crop farmers who focus on grain production. Pasturelands have shifted to smaller farms as opposed to croplands which have consolidated and expanded over the years. Smaller family farms are most likely to be owned by the primary operators, while mid-sized to large farm operations tend to be a blend of rented and owned farmlands.
3. A Combination of Both
More than 72 million acres of U.S. farmlands are rented out by the primary operators of an agricultural operation. This is particularly beneficial to primary operators who are reaching the age of retirement. Partial leasing of agricultural land can ease the workload, while still enabling them to collect consistent returns. This combination method is also useful for investors interested in entering the world of agriculture with minimal experience in the industry to secure steady returns even if their own operation doesn’t initially turn a profit.
Coastal Differences in Owning Agricultural Land
The advantages and disadvantages of farmland ownership vary based on geographical region, but one factor is universal—they aren’t making any more of it. In fact, population increase has led to the rapid development of land for commercial and residential use. From 2012 to 2018, total farmland acreage in the U.S. declined more than 15 million acres.
The shrinking of agricultural land that is available along with the low-risk stability of steady returns has motivated many real estate investors to add it to their portfolios with the added benefit of conserving the land on which keeps our nation sustained. But how does rural land ownership differ on each side of the country?
Western Farmland Ownership
The western part of the country has more rural land available, but not without heavier government regulations coupled with the risk of drought. Luckily, farmers and land investors have used these regulations to increase potential revenue streams by participating in government conservation programs.
For example, a third-generation cattle rancher who had been negatively impacted by several years of severe drought used USDA programs to help with crop insurance and to fund diversification of her operation. The conservation and sustainable practices she implemented over the years—such as rotational grazing—paid off through government incentives and allowed her to solidify her financial position to refinance an existing mortgage debt, purchase cattle, and secure an operating line of credit with AgAmerica.
Eastern Farmland Ownership
Unlike the western region of the U.S., the biggest challenges for East Coast agriculture include excessive rains, a saturation of farms, and lack of contiguous land. Lack of rural land available can make it more difficult to find opportunities to purchase, but will often lead to a steeper increase in the value of agricultural land once owned.
Secure Financing for Rural Real Estate Investments
As U.S. farm owners face the challenge of decreasing access to available U.S. farmland, agricultural land ownership becomes more competitive. Competing land use such as urbanization further increases the value and importance of the remaining rural real estate in our country. The actions of the 3 million rural landowners in the U.S. will directly impact the future of agricultural operations, rural communities, and our domestic food supply.
Farmers, ranchers, and landowners all have a role to play in the essential industry of feeding our nation and the world. Rural land is of paramount importance to keep this country sustained and more cannot be made. The finite supply and resource potential of U.S. farmlands make it one of the most stable and valuable assets available during economic uncertainty, but working with a lender who understands the unpredictable nature of the agricultural industry is key when setting yourself up for success.
If you are interested in securing the financial structure of your portfolio with a stable rural land investment that provides steady returns without depreciating in value, please contact one of our Relationship Managers today.
The 2023 Farmland Report
Understanding the power of equity is key in helping farmers mitigate financial risk. Download AgAmerica's free land report to unlock market insights from AgAmerica's economic research team.
The 2023 Farmland Report
Understanding the power of equity is key in helping farmers mitigate financial risk. Download AgAmerica's free land report to unlock market insights from AgAmerica's economic research team.
