- Actually Buying the Farm
- “Buy Land, They Aren’t Making it Anymore.”
- Claim Your Piece of Farmland
- Farmland Partners (NYSE: FPI)
While sleeping in a cold tent outside the Smoky Mountains, I was awoken by a wild beast snorting and poking his snout into the top of my head. It felt and sounded large enough to be an imminent threat.
Alarmed, I jumped out of my sleeping bag and began frantically deciding my next move. Was it a bear? That would be bad. Are you supposed to stay still during a bear attack? Jump up and down and start screaming? I couldn’t quite remember the rules of engagement.
I turned off my flashlight and stayed quiet as the creature continued circling the tent for what seemed like hours.
All the while, consistent, unnerving howling was echoing through the canyon. Was a wolf circling my tent? A rabid coyote? An incredibly large fox?
My mind continued to wander…
I reflected on a conversation I had at a local Tennessee gas station that morning, where a man named Bryce raved about wild boars “running rampant” around the Smokies. He said that they come out at night to hunt.
At that point, I realized that I could not defend myself against a bear or a wild boar. (I may have been able to deal with a wolf or coyote, but I would have rather not found out).
After searching around my tent for a knife, hammer, or rock – anything resembling a weapon. I settled on my iron-toed work boot and decided to travel outside to meet my fate.
At this time, I had to consider my mortality seriously.
Was I about to buy the farm?
Editor’s Note: What does “bought the farm mean?” The exact origin of “bought the farm” is not documented. However, one theory from the Almanac suggests that “it comes from a 1950s-era Air Force term originally meaning to crash or to be killed in action. According to this theory, some wartime pilots might express the wish to stop flying when the war was over, return home, buy a farm, and live peaceably ever after.
When one tragically died due to a collision or was shot down, their buddies would shake their heads and mutter, ‘Well, I guess he bought the farm.’ In this case, however, the ‘farm’ was a burial plot.”
Thankfully, whatever creature was stalking me had scattered away when I emerged from the tent with a headlamp and boot. Relieved but a bit shaken, I went back to sleep because I had some serious work to do in the early morning.
Actually Buying the Farm
I mentioned buying the farm because that was the sole reason I was even in that tent, to begin with. My dear friend had purchased a farm in Tennessee and needed my help to build a farmhouse and reconstruct a barn.
She plans on growing organic vegetables, herbs, and potatoes to sell in a local co-op.
We spent the better part of the week laying the foundation of the house, framing it, and putting up rafters. The other half was spent tilling the soil, erecting the greenhouse, and laying beds for the crops.
That is to say that a ton of blood, sweat, and tears are involved in preparing a farm – and that’s well before you have to start harvesting.
But for farmers that have cultivated their land over the years, farmland proves to be a seriously lucrative investment. Not only have farmers seen the value of their crops rise over the years, but the amount of equity they have grown in the land itself has made farmers incredibly wealthy with a safe store of value.
In fact, farmland prices have been going ballistic over the past few years.
A series of economic forces — high prices for commodity crops like corn, soybeans, and wheat; a robust housing market; low-interest rates until recently; and an abundance of government subsidies — have to create a “perfect storm” for farmland values, according to Jason Henderson, a dean at the College of Agriculture at Purdue University.
This has driven larger investors into a feeding frenzy as they snap up acre after acre at record prices.
According to the Land Values 2022 Summary from the USDA:
- The United States farm real estate value, a measurement of the value of all land and buildings on farms, averaged $3,800 per acre for 2022, up 12% from 2021.
- The United States cropland value averaged $5,050 per acre, up 14.3% from the previous year.
- The United States pasture value averaged $1,650 per acre, an increase of $170 per acre (11.5 percent) from 2021.
That is the highest on record since 1970.
“Buy Land, They Aren’t Making it Anymore.”
According to the USDA, farmland has generated a positive yearly return since 1991, culminating in an average annual return of 11.5%.
That means that farmland investments have remained solid through some of the most challenging market conditions – including three market crashes. One of the reasons for this is the fact that farmland is a finite resource. As Mark Twain once quipped, “Buy land, they aren’t making it anymore.”
The land can also generate profits in a few different ways.
Farmland actively yields crops that can be sold for a profit. And as we are experiencing now, farms can operate very effectively during high-inflationary periods since they can raise the price of their crops. So farmland works as a great hedge against inflation.
It is also far less volatile than the stock market and is a great holder of value.
It’s no wonder billions of investment dollars are flooding the market. Billionaires have quietly begun amassing huge swaths of land all across the country:
- Microsoft founder Bill Gates owns 242,000 acres of farmland in 18 states, with the largest holdings in Louisiana (69,100 acres), Arkansas (48,000 acres), and Nebraska (20,500 acres).
- Media mogul Ted Turner owns around 2 million acres – much of which is dedicated to bison ranches.
- Billionaire Liberty Media chairman John Malone owns the most land overall at a staggering 2,200,000 acres.
If you are reading this, I'm assuming you probably aren’t a billionaire – or have the funds to start outbidding most major land investors. Buying and maintaining your own farm as an investment is completely out of reach for most of us. That’s why 30% of all farmland in the U.S. is owned by landlords who don’t farm themselves.
So instead of leveraging your life savings on buying the land, heavy equipment, fertilizer, and labor that it takes to run a successful farm, it would be more prudent to the retail investor to, in essence, become a landlord yourself with one easy step.
Claim Your Piece of Farmland
I’ve already detailed how difficult, expensive – and just plain dangerous – it is to start a farm. But with a farmland REIT (real estate investment trust), it’s as simple as buying stock to gain exposure and safety to the farmland market.
Buying into a REIT is much like becoming a landlord – you collect checks for somebody using the land you’ve bought and cultivated.
Farmland REITs are rather simple. In one case, the company will acquire the land necessary for farming and lease it to the farmer in a long-term lease. They can also provide capital to farmers to expand their operations, increasing the property's value for both the company and the farmer.
These leases are typically a triple-net lease (NNN) structure. A triple-net lease is a good thing for investors like us…
I’m sure we’ve all been in a situation where you’re renting a property, but you are a bit unclear about the bills you pay that are different from what your landlord pays. Perhaps you foot the bill for electricity and internet, but your landlord takes care of the water bill, insurance, and property taxes.
This arrangement is quite clear with a triple-net lease structure: the tenant or lessee pays all the property's expenses, including real estate taxes, building insurance, and maintenance. The company itself collects the rent.
That rent typically rises yearly and contains an inflation-linked escalation clause, ensuring that the company will maintain a stable and consistent cash flow.
And once the farm produces crops, you, as the shareholder, get a piece of their bounty – both in the form of stock appreciation and a mandatory dividend.
Gladstone Land (NYSE: LAND) is the largest farmland REIT out there – they own 164 farms with 113,000 acres in 15 states worth $1.5 billion in total. LAND has also made monthly dividend payments consistently since its IPO in 2013. The company has increased those dividend payments 26 times over the past 29 quarters.
That is to say, Gladstone Land is a solid farmland REIT.
However, I have a lesser-known company that I think has more potential for both long and short-term growth…
Farmland Partners (NYSE: FPI)
Farmland Partners owns nearly 200,000 acres of farmland that it leases to over 100 tenants that grow 26 different crops in 18 states. It collects rent from these projects and earns management fees for 25,000 acres for other farmers.
FPI also provides auction, brokerage, and third-party farm management services. The company also utilizes some farms for renewable energy like solar and wind projects, which also contributes to their revenue streams.
Over the last three years, Farmland Partners has provided a nearly 32% annualized return. That's over three times the S&P 500 during that same period and is around four times more than today's inflation rate.
That's a 110% total return, which doesn’t include the dividend, hovering near a 2% yield.
The stock got a bit of a boost after releasing Q3 numbers that beat expectations:
- Operating income was up over 200%
- Increased net income by $3.8 million
- Increased Adjusted Funds From Operations (AFFO) by $5.7 million
- Decreased debt by $16.0 million while maintaining $48.0 million of undrawn capacity
- Renewed approximately 60% of leases expiring in 2022 at average rent increases in excess of 15%
Wall Street liked what it saw, and the stock broke over 5% higher after reporting.
Here are the stats for Farmland Partners (NYSE: FPI):
Market Cap: $725.12 million
PE Ratio: 48.23
EPS: 0.27
Dividend Yield: 1.82%
52-Week Range: $10.62 – $16.43
FPI is a great way to diversify your dividend portfolio with a sector that is known for being resilient against inflation, market dips, and even recessions.
Just this month, the world hit a record population of 8 billion. Those mouths need to eat, and companies like Farmland Partners are making it possible – and will continue to well into the future.
So whether it’s a bear outside your tent, or a bear market lurking towards your portfolio, you’d be wise to gain exposure from this very underrated sector.
Godspeed,
Jimmy Mengel
The Profit Sector
