why invest: farmland is an income producing hard asset that provides true diversification
income
Investors in stocks receive income through dividends. Investors in farmland receive income by renting land to a farmer. This can be accomplished under two basic arrangements:
CASH RENT
Under a cash rent arrangement, a tenant (farmer) pays a fixed amount of rent to landlord (land owner) to use the underlying farmland. Typically, rents are either paid in advance or guaranteed by a letter of credit.
SHARE CROP
Under a share crop arrangement, a landlord (land owner) does not receive a fixed amount of rent from a tenant (farmer) but rather receives a portion of the crop produced on the land. The farmer bears all input costs, while the land owner receives a portion of the crop, typically 1/3.
Unlike other real estate, farmland is always 100% rented. The reason for this is that farmers aggressively seek additional land to rent. Most farmers need additional land in order to spread the cost of their equipment over additional acres.
appreciation
Farmland has an excellent track record of capital appreciation. Farmland values in our focus area have risen from $1,263 per acre in 1991 to $6,844 per acre in 2020. Within this 30 year period, values have decreased in only 3 of 30 years, marking a steady rise in value:
Farmland values per acre are a weighted average of our focus area which includes Atchison, Holt, Lafayette and Saline Counties of Missouri. 2020 land values are per MU Extension Land Values Opinion Survey. Preceding years are determined by reducing 2020 land values by USDA statewide appreciation rates.
diversification
To provide true diversification, an investor must have a portfolio that contains investments with negative price correlation. That is, when the price of one falls, the other rises. Farmland is one of the few assets that have a negative price correlation with stocks and bonds. Over the years, the low in price of one has been offset by the high in price of the other. Assembling a portfolio of negatively correlated assets is the only way to achieve true diversification. An investor may have a thousand different investments but if they have a positive price correlation, there will be no true diversification and reduction of risk.