Benefits of Investing in Farmland
- Land value continues to rise over time
- 3-6% cash-on-cash returns along with potential for land appreciation
- Highly competitive farm rental market = higher rents on the horizon
- Farms are a "real asset," not a "paper asset"
- Inflation protection
- Commodity exposure without significantly lower volatility than futures or commodity funds
Cash Flows are Virtually Guaranteed
Typical rental agreements have the farmer pay a portion of their annual rent at the beginning of the calendar year before any crops are planted. Weather, grain prices, and other factors are the farmer's issues. Landowners simply collect the rent and pay the taxes and liability insurance (which are minimal). Current rental rates are creating cash flows of 3-6% of the farm value, which is historically low. We expect farm cash flows to increase over the next several years due to the competitive rental market and rising grain prices.
4 Factors Driving Crop Prices
- World population growth
- Production of ethanol and biofuels
- Global money supply increases creating inflationary pressure
- Development of middle class in emerging markets consuming high protein diets
Farmland Balance Sheets Are Favorable
According to the USDA, farmland debt-to-equity ratios are near all time lows. Most U.S. farmland is owned outright, without any debt against it. Low leverage means less price fluctuation. Asset bubbles are caused when debt is used to highly leverage investments. Farmland is likely to maintain its value because the balance sheets of America's farmland could not be more solid than it is today.