Bill Gates bought huge tracts of farmland. Warren E. Buffett acquired a 400-acre farm in Nebraska in the 1980s that produced corn and soybeans, believing that this investment in agriculture “had no downsides and potentially had substantial benefits.”
This logic may sound appealing. But can investors in mutual funds or exchange-traded funds follow the examples of Gates and Buffett? Yes, but unless you buy your own cornfields or pasture for cows, only indirectly. No mutual fund or ETF exclusively owns land.
Instead, funds and ETFs either own shares of agribusiness companies, like Deere & Company and Archer-Daniels-Midland, or buy futures on commodities, like corn, soybeans, and wheat.
The investment case for agricultural land – and therefore for a fund that could replace it – can be summed up in two words: scarcity and necessity. The supply of arable land is limited – less than a fifth of the land area of the United States is suitable for agriculture – and food is essential. Unless everyone is hunting and gathering, the world needs farms.
And farmland has gained in value over the long term. The US Department of Agriculture says the average price of an acre of cropland in the United States has increased by about 75 percent over the past 15 years.
Of the funds and ETFs investing exclusively in agricultural stocks, the oldest and largest is the VanEck Agribusiness ETF. It is an indexed offering that passively owns 54 shares in companies ranging from agricultural machinery to aquaculture.
It invests worldwide, but about 60% of its holdings are in the United States. It reported an annual average of 9.7% over the decade that ended in September.
Brandon Rakszawski, ETF Product Development Director for VanEck, said the ETF is not about replicating farmland ownership, but rather reflects the investment theme of a “growing population and the need to feed more in addition to people “.
Since the fund owns stocks, its movements follow those of the stock market: its returns correlate about 90% with the S&P 500. This means that it would offer little additional diversification to someone who already has money. many large cap US stocks.
Farmland, on the other hand, barely correlates with the stock market, according to an analysis by Todd H. Kuethe, agricultural economist at Purdue University. Thus, owning farm acreage could add diversification to an equity portfolio, as the value of land could fluctuate when the market fluctuates.
Another way for a fund investor to reap some of the benefits of farmland is through a commodity ETF like the Invesco DB Farm Fund. This indexed offering buys commodity futures contracts for a wide range of agricultural commodities, as diverse as coffee and cotton. Futures contracts are contracts that force someone to buy or sell a commodity at an agreed price and date.
Jason Bloom, head of Invesco’s Fixed Income and Alternative ETFs, called the fund “reasonable, though imperfect representation” for farmland ownership. Crop prices determine the value of commodity futures, creating an indirect link between the value of the fund and that of farmland, he said.
The fund has lost an average of 4% per year over the past decade, although it has rebounded in recent times, falling back to 19% since the start of the year.
Ben Johnson, director of global ETF research for Morningstar, said he’s not surprised that farm funds can’t really replicate the investment benefits of land ownership.
Funds and ETFs “give you exposure to a diversified basket of securities,” he said. “But will these correlate well with farmland values? In all likelihood, no, because they expose you to the income of the producers, not the land they own.
Someone willing to venture beyond funds and ETFs has other options to try and turn dirt into dollars.
Various investment vehicles own agricultural land or help finance it. These instruments may be riskier than broad-based funds because they are less diversified.
Several publicly traded real estate investment trusts (REITs) own farmland. Paul A. Pittman, president and CEO of Farmland Partners, a Denver-based REIT, said global trends – scarcity of arable land and growing demand for food – make his company’s holdings valuable.
Farmland is analogous to an “inflation-linked bond,” he said. Rent paid by farmers produces a bond-like cash flow, and these payments and the underlying value of the land have kept pace with inflation.
Mr. Pittman grew up in a farming family in Illinois and began buying land there while working as a lawyer and investment banker. He eventually transferred much of that property to Farmland Partners, which went public in 2014.
Today, the REIT owns more than 150,000 acres in 16 states. Its shares have returned an annual average of 5.2 percent over the past five years.
New online outfits have also appeared to speed up investments in farms. They are aimed at sophisticated investors because they are not registered and regulated in the same way as mutual funds and ETFs.
Like Mr. Pittman, Carter Malloy started his business, AcreTrader in Fayetteville, Ark., After purchasing farmland himself. He had been frustrated by the complexity of the process.
“It was difficult to do and expensive,” he said. “There is no multiple listing service for farmland and you need regional expertise. “
He said AcreTrader aims to make buying easier by valuing farmland and allowing people to buy partial ownership of farms. “For us, the goal is to democratize the asset class and bring investments to rural areas. “
Each AcreTrader trade has a minimum investment – recent minimums have ranged from $ 8,800 to $ 40,000 – and clients often buy more than one, Malloy said.
Perhaps the easiest way to invest in farmland is the first: buy property yourself.
Prices vary depending on size and location, but Purdue’s Professor Kuethe said $ 800,000 to $ 1 million might be typical. Buyers are often experienced farmers looking to expand, or people raised on or around farms.
Annie McCauley and her husband, Kirk, teamed up with close friends to buy a farm in Uniontown, Ohio, just down the road from their home. Ms. McCauley is a financial advisor with Sequoia Financial Group in Akron, Ohio. She initially saw the purchase as an investment and assumed the land would be leased to a local farmer. But Mr. McCauley, a business owner whose family owns a dairy farm in Ohio, wanted to operate it.
The McCauley’s and their two sons often spend weekends on the farm planting, tending and harvesting soybeans, hay and alfalfa. This provides intangible benefits.
“The farm would have had positive cash flow earlier if we had rented the land from another farmer because we wouldn’t have had to invest in equipment – tractors, balers,” Ms. McCauley. “But it would also have diminished the joy of cultivating it ourselves.”
A long-term investment in a REIT, ETF, or mutual fund simply cannot provide this kind of practical satisfaction. Then again, you may be able to prosper while others are working the land, and there may be some joy in that as well.