Buying Farmland: Is It a Good Investment? Answered With Hard Data

Is buying farmland a good investment? The facts are: land is expensive and you would need an average return of 13% or more for the investment to provide a better return than the stock market. It’s also hard to nail down an exact rate of return on land, but it is possible to see upward of 20% per year, based on my research. If you think farmland might be for you, keep reading and look for future articles on the subject as well.

“Gold with a Dividend”

I have a friend whose father buys a lot of farmland. He went from having $0 to a net worth of about $50 million in the span of 30 years. Warren Buffett even owns a big plot of land a few hours from me.

So, put on your stereotypical straw hat and bib overalls and let’s look into becoming farmers!

As most loyal readers know, I grew up on a farm. I’m still pretty involved (harvest video coming in the next few weeks). Every adult on my dad’s side of the family owns farmland. And they all have their reasons:

“They aren’t making any more land.”

“Land will always be worth something.”

“Even if commodity prices go to heck, you can at least still feed your family.”

But the most interesting response I’ve heard is: “It’s gold with a dividend.”

All these comments give me a warm feeling about buying land. But, as with everything, I want to look at the facts. Call me stubborn. Plus, it’s hard for me to convince myself to buy in when land prices are hovering around $10,000 per acre.

Yep, one section (mile by a mile) of irrigated land in Nebraska (which isn’t even enough land worth bragging about) can easily go for $6,400,000, plus taxes. And it’ll take easily $700/acre to grow the most popular crop: corn. After paying those bills, the best you have is the potential to make a profit. You’ll be sitting on a $6,840,000 investment to begin farming one section of land with zero guarantees of making even a buck.

But, without risk, you’re without reward. So, I hopefully haven’t scared you too much. We can’t just look at the expenses, we have to look at the potential profit too. But, first, let’s figure out the rate of return we would need to get in order for all this to be worth it.

What Could You Do with the Money Instead?

Right now, I have the first $100,000 I earned and more invested in the stock market. I’m comfortable with that. Year to date I’ve probably made 18%-23% on that money. I like equities. And all this is in my lazy portfolio.

Related Article: Mutual Funds that have Averaged 12% for the Past Five Years

What else could you invest your money in? Tangible items such as cars, houses, comic books, and John Wayne memorabilia are all terrible investments. You could buy real estate, but that nets you about the same as the S&P 500 with additional headaches. Bonds are terrible for returns but they do stabilize your portfolio, so if you want to have your age in bonds, that’s cool. (More about bonds in a minute because that’s actually very important when considering whether or not to buy farmland.)

So, basically, we need a 13% return or more in order to get into the industry of agriculture.

How Much Can I Earn on Farmland?

The reason farmland is often called “gold with a dividend” is because you can expect a 5% to 6% annual appreciation for the land and another 4% for the crop you raise each year. But the story does not end at 10%.

*checks clock* I’ve researched now for five hours trying to nail down an exact rate of return on land. The trouble is, it’s difficult. Why? For about a billion reasons but here are a few:

1. It depends on what type of commodity is grown and its current price in order to project your dividend return.
2. Farmland closer to a city rises in value more rapidly, for obvious reasons.
3. Former non-irrigated land, with new technology, can now be irrigated (doubling the price), so that impacts the typical rate of return since some farms get lucky and find water and some don’t.
4. Nut jobs in certain areas buy up land for far more than its worth just to flaunt their ego/inflate their ego.
5. Land typically sells once in a generation, so it’s hard to gauge a plot of land’s true value since its surrounding land hasn’t been put up for sale in such a long time. No one really knows what a property is worth if nothing around it is selling; people can guess but without capitalism working in its full cycle, you’re never really sure.
6. How you buy it makes a difference: live auction, silent auction, talk your neighbor into selling it to you privately, etc.

If you want some in-depth reading (read: painful), check out these two academic papers I read: Farmland and Values: Current and Future Prospects and Purdue Ag Economics Report August 2014.

My conclusion is that from what I can tell, 10% is easily obtainable, and upward of 20% per year is possible.

Farmland Buying Options

If you want to start buying farmland, here are your options:

1. Buy non-irrigated ground. The land costs less than half the price of irrigated at around $4,000/acre, but your crop will be worth less each year since it doesn’t get any water but rain.
2. Buy irrigated ground. It’ll cost you $10,000/acre but you’re basically guaranteed to raise a fine crop each year.
3. Farm your land. How will the land get farmed? Cash rent? Sharecropping? Are you farming it yourself?
4. Farming REITs. About 3 million people own America’s farmland; not all of them are farmers. You can buy into a farm using real estate investment trusts like those listed in this article.

Note: In upcoming posts, I’ll talk more about how to get 20%. And before the end of this series on farming, I’ll determine if I’ll put my own money into farmland. Following the path of Warren Buffett sounds like a good decision.

In Summary

Being an agricultural landowner is a wise move as long as you buy when the prices are down. In equity investing (the stock market), this doesn’t make a ton of sense. But when it comes to farmland — it is very cyclical and it’s fairly predictable — about once every 20 years land prices spike and fall. If you buy on the fall — and only on the fall — you have the chance to earn more than with equities. If you are not patient enough though, it makes little sense to buy farmland. Unless you’re doing it largely for enjoyment — then go right ahead.