PART ONE
THE ROLE OF THE FARMER
We’re going to start off this report with one truth rarely discussed when it comes to farmland investment.
THE ROLE OF THE FARMER
Farmers are what give farmland its value.
Although farmland is a hot topic in the investment world right now, the critical role of the farmer in creating income from farmland and setting the price for farmland is rarely discussed. The first and most consequential question to ask yourself when investing in farmland is this:
"How pro-farmer am I going to be?"
How you answer will affect the quality of the deal flow you have access to, the price you pay for land, and how productive and value-creating the farming practices that drive capital appreciation upside will be. Beyond return, it will impact the economic health of rural communities, environmental sustainability, and national food security.
Farming requires specialized knowledge and skills in areas such as agronomy, animal husbandry, soil science, irrigation, pest and disease management, and farm management. It involves activities such as planting, nurturing, and harvesting crops, breeding and raising animals, managing agricultural land, and employing techniques to maximize yields and ensure the quality of the product.
It comes with challenges related to weather conditions, commodity market fluctuations, changing consumer demands, and sustainability practices. It is a low margin, high operating leverage business, where being just a little bit more efficient in all areas can have an outsized effect on profits. The quality of the farmer and the sustainability of their farming practices has material effect on the long-term value of a piece of agricultural land.
“Farmland is the means of production, but without a farmer, farmland is just dirt.”
DR. DAVID MIECZKOWSKI
EVP CHIEF INVESTMENT OFFICER
THE ROLE OF THE FARMER
The Farmer Lifecycle
Farmers can be categorized according to what stage they’re at in their farm journey.
THE ROLE OF THE FARMER
Who Owns U.S. Farmland?
Farmers don’t just determine the income potential of farmland—they own the majority of it.
DID YOU KNOW?
Over 75 percent of farmland in the U.S. is owned by an active operator or a retired farmer. For a farmer that owns their land, that land makes up over 80 percent of their assets. In contrast, less than three percent of farms are non-family owned—which includes land that is institutionally owned—and account for up to 14 percent of the total value of production.
Number of U.S. Farms
(percentage distribution by farm type, 2018)
SMALL FAMILY FARMS
MIDSIZE FAMILY FARMS
LARGE-SCALE FAMILY FARMS
NONFAMILY FARMS
Land Operated
(percentage distribution by farm type, 2018)
SMALL FAMILY FARMS
MIDSIZE FAMILY FARMS
LARGE-SCALE FAMILY FARMS
NONFAMILY FARMS
Value of Production
(percentage distribution by farm type, 2018)
SMALL FAMILY FARMS
MIDSIZE FAMILY FARMS
LARGE-SCALE FAMILY FARMS
NONFAMILY FARMS
Source: USDA, Economic Research Service and USDA, National Agricultural Statistics Service, 2018 Agricultural Resource Management Survey
Just one percent of farmland trades hands in a sale between nonfamily members, and most of that is sold farmer-to-farmer through an off-market transaction that avoids a broker or auction. This means that farmers and their families set the price of most farmland, determining the potential for active or passive farm income to be earned from farmland ownership.
The Owner-Operator Perspective
Buying a farm to become an owner-operator is less like making an investment and more like buying yourself a full-time job. For full-time professional farmers, the rent vs. own economics strongly favor ownership, which is why 60 percent of farmland is farmed by an owner-operator.
Even when the economics suggest that leasing land and investing the capital that would have otherwise been used to own in a comparable risk asset, farmers tend to favor land ownership as their preferred means of generating wealth. Farming is not just an occupation, but a lifestyle choice, and ownership conveys a greater sense of pride and control over their financial future for a farmer than tenancy.
NON-OPERATOR LANDLORD VS. OWNER-OPERATOR RETURNS
The Non-Operator Landlord Perspective
Two-thirds of non-operator land was acquired from family, either as a gift/inheritance (54%) or through a purchase from a relative (11%). Only one-third of farmland owned by non-operator landlords—which includes institutional investors and corporations—was purchased from a non-relative.
A majority of non-operator farmland that is owned by someone who has never farmed was acquired and held for reasons that are not purely investment-related and which carry family ties.
That said, farmland is still an attractive investment for the non-operator landlord for a number of reasons.
BENEFITS OF FARMLAND INVESTMENT
- Near zero vacancy rates
- Significant federal support
- Non-depreciating, finite, and essential asset
- Highly stable asset values
- Inflationary hedge
- Portfolio diversification