The Reasons Why Wealthy Investors Consistently Turn to Farmland Investments

As inflation remains stubbornly high and stock market volatility keeps investment capital on the sidelines, investors are increasingly looking for alternative investment opportunities that can outperform traditional asset classes. Since the pandemic, supply-chain issues have persisted, demand has surged, commodity prices are skyrocketing, and the U.S. Federal Reserve continues to raise interest rates. Interest rates have reached their highest level since 2006, rising to 4.75% - 5% as of April 2023. While the Fed continues to combat price stability and monitor recent bank failures, the verdict is still out as to whether the current economic climate is the global economy’s new normal. Many high-net-worth individuals (“HNWIs”) we have talked to are on the lookout for more stable, inflation-resistant investments. We share the reasons here why wealthy investors consistently turn to farmland investments to satisfy these requirements in their own portfolios.

Why are Farmland Investments Good Inflation Hedges? 

Many of our readers may already be well-versed in inflation hedging assets like farmland and agriculture. Unlike many other asset classes that run what we think is a greater risk of losing value during inflationary periods, land and other real assets are known for maintaining their value in the face of a decline in purchasing power. In fact, according to the NCREIF Farmland Index, the value of U.S. farmland owned by investors rose 10.2% in 2022, while the average inflation rate was 8%. As inflation rises, farmland values tend to rise as well in almost a directly correlated fashion. The chart below displays farmland’s correlation of 0.97 out of 1.00 from 2020-2022 to the Consumer Price Index (CPI), which is commonly used as a metric for inflation. Furthermore, farmland has demonstrated resilience during inflationary periods compared to other asset classes, which demonstrates that during times of increased inflation farmland is one of the best assets available as a capital preservation tool, even greater than private real estate. 

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Favorable Trends in Farmland’s Total Investment Returns vs. Other Asset Classes

Why might increases in the CPI correlate with higher farmland investment returns? The answer is that inflation most commonly leads to rising commodity prices on agricultural products coming from the farmland. Think of a food staple like corn or coffee. Farmers are increasing their revenue in line with that rise in commodity pricing, which also gives rise to appreciation in the underlying land valuation. When farmers can charge more for their goods, the value of the land that produces those goods also rises. This speaks to one of the additional benefits of farmland over assets like gold or commercial real estate - the total returns on the investment, on average, outperform other comparable asset classes. According to “Farmland: A Historically Stable Asset During Uncertain Times”, the average annual return on investment in farmland of 10.71% outperformed all other comparable asset classes from 1992-2022, with gold at 5.42% being the worst performer. The myth that gold is the asset class that investors should turn to in an inflationary environment is one that we can largely set aside here.

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Pricing Volatility is Lower in Farmland vs. Other Traditional Asset Classes

Inflation hedging and a heightened investment return profile are not the only benefits of farmland investments. Another key area for high net worth investors to consider is reduced pricing volatility. Why is this important? In short, with reduced pricing volatility you can more accurately predict a future exit price and thus an appropriate purchase price for your asset and exits become easier to manage. For instance, if you have a heavily concentrated U.S. stock portfolio and general U.S. equity markets are down, you may play the “wait on the sidelines” game, hoping for asset prices to rebound, before selling your position. With farmland, the pricing volatility seen with equities or gold, for instance, is significantly lessened, so that in the event of an exit your exit timing is less of an issue. 

A future sales price also becomes more readily predictable in the case of decreased volatility, which can help investors invest at the right price point versus trying to do the same with, for example, common equities. You can see below a chart showing how farmland and other asset classes’ performance compare. The chart clearly illustrates the limited volatility and more stable financial performance of farmland in comparison to other asset classes over the last three years. 

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Supply and Demand of Farmland Favors Farmland Investments Performing Well Over the Long-Term

Another way to view farmland’s stable real value comes down to whether you forecast that supply and demand for farmland will increase or decrease in the long-run. From our perspective, it is evident that demand for farmland investments will only be increasing as supply wanes. The Food and Agricultural Organization of the United Nations reports that by 2050, we will need to increase food production by over 50% in order to feed our growing and more prosperous global population. At the same time, the rise in land being repurposed for human use is decreasing the available supply of farmland. These two factors have profound implications on the responsibility and pressure for farmers and agricultural companies to innovate. Decreased supply also inherently drives up the value of arable land and the companies that specialize in land management, infrastructure and agricultural assets who own this arable land. This can be good news for investors interested in investing in farmland and agricultural companies.

What Are Global Investment Leaders Doing in Farming and Agriculture?

"I needed no unusual knowledge or intelligence to conclude the investment had no downside and potentially had substantial upside.” - Warren Buffett, letter to Berkshire Hathaway shareholders regarding farmland acquisitions

"I believe that agricultural land, productive agricultural land, with water on site will be very valuable in the future, and I have put a good amount of money into that.” said Michael Burry, in an interview with Bloomberg and elsewhere.

How have these characteristics of farmland investing manifested in decision-making from wealthy investors? Like the old saying goes “they aren’t making any more of it”. High-net-worth individuals have diversified their investments by investing in farmland during economic uncertainty. Approximately 60% of land in the United States is privately owned by wealthy individuals and families. Billionaire John Malone is ranked as the largest U.S. landowner as of 2023, owning 2.2 million acres. Joined by Bill Gates and Jeff Bezos, the farmland frenzy is catching steam. Bill Gates' investments in farmland are in-line with other high-profile investors like Warren Buffett. 

Buffett is also famous for his distaste of gold, cryptocurrencies and other non-productive assets as investments. He once commented in an interview when presented with a choice between owning all the gold in the world or all the farmland in the U.S. to, “call me crazy, but I’m taking the land.” 

Challenges of Investing in Farmland

While there are many benefits to farmland investments, the asset class is notoriously difficult to access for individual investors. It may be easy for ultra-high-net-worth individuals (UHNWIs) and institutions to purchase huge swaths of land, but for the average investor, being a 100% owner of a large piece of productive farmland is often not feasible. Below is a table laying out some of the key challenges a typical investor, even high-net-worth individuals who want exposure to farmland within their portfolio, face when trying to invest in farmland.

As you can see, the current availability for true exposure to farmland investment opportunities can be very difficult for private U.S. investors due to a confluence of variables. Institutional investors have made it difficult for HNWIs to participate without making a 7-figure placement in their funds or by competing directly against them in any potential acquisition scenario. The above details largely focus on investing in U.S. based farmland; investing internationally is even more difficult. Many of the HNWIs in our network at Legacy Group are looking to diversify outside of the U.S. into agricultural investments that are denominated, or readily transactable, in U.S. Dollars for all the investment benefits mentioned above, plus the benefit of international diversification - for example through investments into our portfolio company, the Green Coffee Company. 

How to Build a Unique, Market-Leading Farmland Investment

At Legacy Group, we have developed our own method of building attractive investment opportunities in farmland and the agricultural sector for investors. Our business-building strategy can be broken down into a few primary themes:

1. Focus on markets in developing countries that are better positioned to earn outsized returns compared to the oversaturated U.S. market.
2. Target agricultural products that are highly liquid and transactable due to significant global demand, like coffee.
3. Product sales should be done in USD to act as an effective hedge for U.S. investors. A focus on the United States as the target consumer market for products is preferable.
4. Use multinational corporate structures for investors with headquarters in the United States so that our businesses have multiple exit opportunities such as a private sale or U.S. IPO; investors get all the benefits of U.S. law around their investment and the investment process becomes more frictionless versus international transfers and banking processes. 

Final Thoughts

Farmland investing gives hope to investors in hedging against inflation, searching for heightened investment returns and security on future exit valuations and purchase prices. It is a valuable asset class that continues to be profitable, even during economic instability. Farmland has stood the test of time, generating positive combined annual returns over the asset class’s history. Elevated commodity prices help drive farmland values up, while having a low correlation to the stock market’s volatility. As the availability of land continues to decrease and the demand for food increases, farmland investing is poised to be a strong investment option for the foreseeable future. 

About the Authors

Cole Shephard is the founding partner of the alternative asset manager, Legacy Group, and the founder and a board member at the Green Coffee Company. As a former PwC alum working in accounting, advisory and consulting solutions across the United States, Bermuda, Hong Kong and Beijing, Cole is an expert in emerging markets and understanding the capital movements of high-net-worth investors.

Adam Jason is a partner at Legacy Group and a board member at the Green Coffee Company. He is an attorney specialized in corporate finance, governance, securities regulation and international business transactions. He has advised Fortune 500 companies and investment banks, including JP Morgan, Morgan Stanley, Citibank and Goldman Sachs, through initial public offerings (IPOs) and offerings of debt and equity securities exceeding an aggregate of $10 billion.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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