PART TWO
U.S. FARMLAND: WHY INVEST NOW?
Now that we’ve unpacked one uncommon truth when it comes to farmland investment, here’s another reality not being discussed nearly enough.
WHY INVEST IN U.S. FARMLAND
The era of the multigenerational American family farm is coming to an end.
The majority of U.S. farms are family-owned and operated. However, with each new agricultural census, there are several key data trends that signal an inevitable change is approaching, including:
ONE. The aging farmer and approaching wave of land transfers.
TWO. A growing population and decline in the supply of arable land.
THREE. The consolidation rate and vertical integration across the value chain.
In this section, we discuss the factors contributing to these trends and how they are leading to a tectonic shift in the U.S. agricultural landscape.
WHY INVEST IN U.S. FARMLAND
The era of the multigenerational American family farm is coming to an end.
The majority of U.S. farms are family-owned and operated. However, with each new agricultural census, there are several key data trends that signal an inevitable change is approaching, including:
ONE
The aging farmer and approaching wave of land transfers.
TWO
A growing population and decline in the supply of arable land.
THREE
The consolidation rate and vertical integration across the value chain.
In this section, we discuss the factors contributing to these trends and how they are leading to this tectonic shift in the U.S. agricultural landscape.
WHY INVEST IN U.S. FARMLAND
The Aging Farmer and Approaching Wave of Land Transfers
Over the next two decades, there is an enormous amount of land that will need to change hands outside the family for the first time in generations. The $3.4 trillion U.S. farmland market, which usually sees less than one percent of farmland selling annually between unrelated parties, will experience an unprecedented wave of acquisition-fueled turnover by growth-minded farmers and institutional investors that could require $1 trillion or more of new equity and debt capital to support.
There are several key forces driving this shift. One is simply an aspect of the so-called “greatest wealth transfer in history”. As with most asset classes, the distribution of ownership of agricultural assets is highly skewed toward the baby boomer generation.
Older farmers are far more likely to own their land than younger farmers. When combined with the holdings of non-operator landlords, half the farmland in the U.S. is owned by individuals who are at least 65 years old. Putting this into dollar terms, farmers and other individuals over 65 own about $1.7T in farmland.
At the same time baby-boomers have been progressing through their careers, there has been a hollowing out of Rural America. Growing up on a farm used to mean becoming a farmer, but the generations following baby boomers have increasingly chosen to move to an urban location to pursue a non-farm occupation. A not insignificant portion being encouraged to do so by their parents, as farming is a difficult occupation that requires a passion for a lifestyle that has been out of vogue for some time.
This has led to a current environment where less than half of retirement-age farmers expect to pass down the family farm to a next-generation family member to own and operate.
Put together, demographic and migration trends are creating a wall of land that will be put up for sale to a non-relative. A notoriously low turnover sector, with only two percent of farmland turning over in a typical year and less than half of that changing hands between unrelated parties through sales, the farm sector will see an uptick in the volume of land that will turnover annually and a rise in the percentage in the turnover that will be in the form of a sale to a non-relative. This means the U.S. could reasonably be expected to see more than $1T in land sales over the next two decades, not accounting for inflation, a 3.5x increase over the prior decade.
DID YOU KNOW?
The United Nations projects the world population will reach 8.5 billion by 2030 and 9.7 billion by 2050.
2010 Actual World Population
2030 Projected World Population
2050 Projected World Population
DID YOU KNOW?
The United Nations projects the world population will reach 8.5 billion by 2030 and 9.7 billion by 2050.
2010 Actual World Population
2030 Projected World Population
2050 Projected World Population
WHY INVEST IN U.S. FARMLAND
A Growing Global Population and Shrinking Supply of Arable Land
Farmers are increasingly facing the constant tension between population growth and food production in their practices. As there are more mouths to feed, there needs to be increased production to meet those needs. Adding to those pressures is the availability of arable land and climate change.
Population vs. Percentage of Arable Land in the United States
(population in millions and percentage of arable land by year)
Population vs. Percentage of Arable Land in the World
(population in billions and percentage of arable land by year)
Sources: World Development Indicators; Last updated May 10, 2023
The percentage of global arable land has been relatively stagnant, growing from 9.5 percent to 10.8 percent since 1960. Much of this growth can be attributed to the expansion of developing countries and deforestation practices. In the U.S., farmers are experiencing a different reality with land availability.
The percentage of arable land in the U.S. peaked in 1969 at 20.7 percent and hit its lowest point in 2012 at 16.9 percent. Since then, it has modestly grown to 17.2 percent. Competition in land use has resulted in arable lands being encroached on by urban expansion driven by a growing population.
To illustrate this point further, we look at the ratio of hectares of arable land to population. Since 1961, this ratio has declined in the U.S. and the World measurements by about 51 percent each. This implies that the rate of change for the growing population is substantially higher than that of arable land.
Hectares of Arable Land per Person in the United States and the World
(hectares per person by year)
Sources: World Development Indicators; Last updated May 10, 2023
So, how are farmers supposed to keep up with the increased demand for agricultural products with less land available to produce on? These demands typically result in innovations to optimize yield outcomes. Farmers are no strangers to developing and adopting new practices to help grow crops more efficiently. Since 1960, significant crops such as corn, cotton, soybeans, and wheat have seen tremendous growth in average yields. Corn yields have increased by 217 percent, cotton by 113 percent, soybeans by 111 percent, and wheat by 78 percent. Data and technology are currently driving innovations in agricultural production.
Precision agriculture, automated processes, and management software are being integrated into farms nationwide, with guidance technology being the most widely adopted practice thus far. The USDA reports that adoption rates for guidance technology range from 67 to 82 percent among the four major crops mentioned. The data support the notion that adopters of these technologies produce their crops more efficiently and have better yield outcomes than those that don’t, so it is not surprising that farmers are willing to adopt these technologies as they make economic sense and aid in meeting food demands.
Farmers’ willingness to adopt these technologies is great news when it comes to long run food security, but it drives what is known as the “Treadmill Problem,” a situation where technological advances in production increase yield outcomes, thus increasing supply and putting downward pressure on the price of agricultural commodities. Over time, population growth will likely offset these price effects, which puts upward pressure on prices by increasing demand for agricultural products. There’s a delicate balance that farmers will need to consider between increased agricultural production to meet food demands, and the greenhouse gas (GHG) effects that production has on the climate.
The EPA estimates that GHG emissions from agriculture represent 10 percent of total emissions in the U.S. and 24 percent globally. However, these estimates do not include the approximately 20 percent of emissions offset by sequestration that removes carbon and nitrogen from the atmosphere. This dynamic generates several benefits, such as improving soil health and moisture-retention properties. Over time, it also reduces the levels of fertilizer and chemicals needed to support production and makes the land more productive and valuable. Regenerative practices, such as no-till and cover crops, can enhance carbon sequestration capacity in agricultural land but require significant capital investment to implement at a large scale.
WHY INVEST IN U.S. FARMLAND
Consolidation and Vertical Integration Across the Value Chain
The USDA defines farm size based on annual gross cash farm income (GCFI), which measures a farm’s revenue, including sales of crops and livestock, government payments, and other farm-related cash income. Farm size is characterized into four primary categories—small, midsize, large-scale, and nonfamily.
< $350K
Small farms have GCFI of less than $350,000.
$350-999K
Midsize farms have GCFI between $350,000 and $999,999
$1MM+
Large-scale farms have GCFI of $1,000,000 or more. This category of farms include two subcategories: large farms with GCFI between $1,000,000 and $4,999,999 and very large farms with GCFI of $5,000,000 or more.
N/A
Nonfamily farms are any farms where an operator and persons related to the operator do not have a majority stake in the business, typically referred to as “corporate farms”.
Farm Consolidation Trends
Since 2000, large-scale and upper-midsize farms have grown in both shares of total farms and land in farms, suggesting consolidation of farmland and production into larger operations. The table below shows the percentage change in the number of farms and land in farms as a percentage of their respective totals and average farm size by sales class from 2000 to 2022. The increase in percentage change for the number of farms is misleading because the share for large-scale has only increased 2.7 percent over the period. However, the growth in the share of land in farms for large-scale farms is significant, with growth from 9.2 to 25.7 percent over the period.
Average farm size has declined across the board over this period, further supporting the decline in available farmland in the U.S. This also suggests that some portion of farmland has transferred from small-scale farms to midsize and large-scale farms by either fractional land sales or outright purchasing of smaller operations, a strategy known as horizontal integration. The growing representation of farmland reflects the degree of concentration moving towards larger operations and implies a diminishing degree of competition for larger farms. We see the concentration in large-scale farms at virtually all meaningful levels except for the number of farms.
DID YOU KNOW?
From 2017 to 2022, the number of U.S. farms fell seven percent to 1.9 billion, while the average farm size increased five percent to 463 acres.
This growth of large-scale operations has slowed since 2012 but continues to be the trend. A steep incline in the share of large-scale operations between 2008 and 2012 coincides with the world economic crisis of 2008/2009 and the subsequent recovery. During this period, global recessionary pressures decreased demand for global trade of agricultural commodities, instigating low commodity prices and stifling the economic growth of smaller operations.
Larger operations tend to be more efficient in production than smaller operations due to economies of size, an advantage generated by increasing production and lowering average costs by purchasing in greater volume and spreading fixed costs across the increased production. This allowed larger operations to weather lower commodity prices better and put them in a better position to expand operations at the expense of smaller ones.
Percentage of Land in Farms by Sales Class
(percentage of farmland in dollars, 2000-2022)
Sources: USDA Farms and Land in Farms Reports; USDA 2022 Census of Agriculture
Vertical Integration
Another approach that allows farms to become more efficient is vertical integration. This strategy reorganizes operations by having ownership of more stages of the agricultural value chain rather than relying on external actors. This is typically achieved by acquiring other companies or establishing in-house suppliers, manufacturers, storage facilities, logistics, processing, distribution networks, and direct sales.
One of the biggest obstacles to consolidation and vertical integration is the significant capital investment required to establish or purchase companies across the value chain. With trends around both strategies expected to continue, especially between production and processing, investors will have more opportunities to finance midsize and large agricultural operations needing significant investments. These strategies better insulate firms against industry volatility, helping to mitigate financial risks associated with financing these operations. Additionally, borrowers implementing this strategy can improve financial ratios such as debt service coverage and debt-to-asset ratios through cost savings, profits, and expanded asset balances from integration.
