Diversifying Your Real Estate Portfolio Into Agriculture
Like any investment, a good real estate portfolio should be diversified. Diversification is a risk management tool and prevents one from putting “too many eggs in one basket,” which can result in catastrophe when things go wrong. Though many people specialize in a particular type of property like single family, multi-family, self-storage, industrial, or office buildings, professional real estate investors generally seek to hedge their portfolios against shifting market cycles by spreading their properties across different localities and product types.
One overlooked type of real estate is agriculture. Agriculture is an essential part of everyone’s lives and benefits from the same population-driven supply and demand factors that propel the housing market. Global food consumption continues its upward trend while the amount of arable land shrinks as sprawling megacities pave over fertile soil. Food, drink, fiber, and timber impact the lives of every individual on earth, but the number of people invested in producing these products is fairly small.
Institutional investors, such as pension funds and university endowments, love farm investments because they provide steady, safe returns from crop yields and land appreciation that are negatively correlated with the stock market. The average large institutional fund might invest somewhere between 3-15% of their investment portfolio into natural resources, including agriculture or timber. Not only do agriculture investments offer a hedge against stock market corrections, they generally outperform the markets over the long term. There are intangible benefits to investing in agriculture also, such as being more connected to food production systems and supporting sustainable farming efforts that produce jobs and grow food in an environmentally and socially conscious manner. For new investors without a farming background, accessing agriculture investments can be challenging.
Buy a Farm
Acquiring and operating a farm is the most direct way to take advantage of the benefits of owning investment agriculture. It is also the most difficult way to get into this asset class, because buying farmland takes significant cash upfront to achieve any sorts of economies of scale. A lot of so-called hobby farmers will buy a small farm and maybe sell some produce at farmers markets, but it can be extremely challenging to make a profit with this model. With the average farm size growing each year and the price of acreage continuing to climb, acquiring farmland for a profitable operation is generally only suitable for experienced farmers and very high net worth individuals who can hire someone to work the land.
Stocks and REITs
There are a few farmland funds and publicly-traded stocks available that own farmland. Some of these funds have fairly high minimums (over $100,000), leaving them inaccessible to the average investor. Like a real estate investment trust that owns office buildings or another property type, REITs rely on a fund manager who decides what individual properties the fund will invest in, leaving those decisions out of the hand of the investor. There are also companies offering stock that don’t own farmland, but supply the inputs into farming, such as fertilizers or machinery. Farmland stocks don’t necessarily offer a shield against greater stock market corrections. One advantage of investing in publicly traded stocks is their liquidity, meaning unlike a direct investment, you can sell your shares pretty much whenever you want.
Partner with Someone
One way to get into an agriculture operation that is large enough to be profitable is to partner with some friends, or maybe dozens of other investors. Syndicating a real estate investment deal can require extensive knowledge of securities regulations, legal fees amounting to tens of thousands of dollars. However, new equity crowdfunding platforms allow direct investment into individual farming operations with minimums that are low enough so that a new investor in this asset class doesn’t feel as if they are putting too much money at risk.