Farmland as a Financial Asset
At Moore & Warner, we believe in growing wealth for generations.
Increasingly, private investors and institutions are learning what ag families have known for years: farm ownership has historically offered strong returns, a low correlation to other assets, and a good hedge against inflation. For investors with patient capital and a long-term time horizon, well-managed farmland can be a compelling investment with the potential for attractive current income and capital gains.
Why Invest in Farmland?
The Macroeconomic Environment: global food demand is rising
The Return Profile: Farmland has demonstrated strong historical risk-adjusted returns
Over the 22 years that the National Council of Real Estate Investment Fiduciaries as been tracking farmland, total annual returns have averaged 12% with low volatility.
The Diversification Potential: Farmland returns have exhibited a low historical correlation to other assets and a natural hedge to inflation
Historically farmland has demonstrated a negative correlation to traditional assets like equities and bonds, which increases farmland’s value as a portfolio diversification tool. The positive correlation of farmland return to inflation (the Consumer Price Index, or “CPI”) has made farmland a good inflation hedge.
Source: University of Illinois, TIAA CREF Center for Farmland Research
How do I buy farmland?
Buying farmland for the first time or adding to a farmland portfolio can be a daunting task for investors unfamiliar with the idiosyncrasies of the farmland market. Investors turn to Moore & Warner to help address two key challenges in acquiring farmland:
- Low farmland market turnover: The University of Illinois estimates that farmland in that state turns over at a rate of about 1% per year. For most investors, identifying and tracking farms available for purchase is time-intensive and inefficient.
- Specialized due diligence: Understanding the value and potential of a farm depends on a multitude of factors related not only to the local market, but an analysis of soils, drainage, production history, taxes, government programs, property boundaries, grain marketing options, and more.
Moore & Warner works with clients through a variety of options to acquire farmland.
Effectively purchasing at public auction requires a deep understanding of farmland value, the local market, and competitive bidders. Excellent buying opportunities can be found at auction, but it requires the regular commitment to be at the right auction at the right time with the right preparation.
Thousands of acres that come up for sale are never “publicly” for sale — a family or owner group might decide for any number of reasons to engage in a direct private sale. Sourcing these opportunities requires constant connection, networking, and business activity within the agriculture and landowner community.
Buy / Lease-Back
For operators near retirement or operators looking for to free up capital in a growing
operation, a sale and lease-back arrangement provides a landowning farmer the opportunity to free up capital while maintaining base acres for his or her on-going farming operation. These buying opportunities can offer investors a contracted or minimum rate of return for the first few years of ownership.
Role of the farm manager
Moore & Warner’s business is maximizing return to our landowner clients through the best active and professional management. Our corporate and family history is a tradition of multi-generational ownership and land stewardship, and we apply these principles to our real estate business. We prioritize farm management and long holding periods, not commissions on high-turn purchase and sales and a revloving door of clients. Investors turn to us for a trusted advisor capable of identifying the right purchase, not any purchase.
Farmland investors have a wide range of leasing arrangements that offer different income and risk characteristics. Aggregate holdings, income and cash flow needs, required or optional capital improvements, and a number of other factors go into determining the lease and farming partner that will maximize return on investment.
The three basic lease types:
Cash rent lease
The defining feature of a cash-rent lease is the negotiation of a per-acre cash payment a farmer makes to the landowner. Today most cash rent leases are “flex-leases” that incorporate a base per acre payment and a variable cash payment determined by yield, commodity prices, or a combination of the two. This structure provides a landowner a minimum rent and level of return with an opportunity to share in the upside of a good year.
A crop-share lease is more akin to a partnership in which a farmer and landowner combine their unique assets, and share decision-making, input costs, and the ultimate grain harvest. Crop-share leases specifics vary by region, but farmers typically provide labor, equipment, and cover fuel costs while landowners provide acreage and cover real estate taxes and major improvements. The two parties split input costs such as seed, fertilizer, and pesticides and at the end of the season split the grain harvest, each taking title to a predetermined fraction of the harvest.
The allocation of expenses and grain can depend on the geography, crop, and local market. In recent years a small per-acre cash payment or “supplemental rent” has become a popular way of adjusting lease economics without changing the historical crop-share ratios.
A custom lease refers to custom farming, or the hiring of a skilled operator and his/her equipment to execute the planting, management, and harvest plan developed at the sole discretion of the farm manager or landowner. Under these lease arrangements, the landowner (or farm manager) makes all the agronomic decisions and the landowner is responsible for 100% of the input costs and owns 100% of the resultant harvest. Custom farming can provide attractive landowner returns, but entails a greater exposure to growing and price risk and requires the greatest amount of landowner or farm manager involvement.
Role of the Farm Manager in Lease Selection
- Identify lease type most appropriate to landowner income needs, risk appetite, and farm characteristics
Lease Negotiation & Operator Selection
- Identify and screen best local operators
- Negotiate market-rate lease terms
- Customize lease to specific farm and landowner priorities
- Review and renegotiate lease on an annual basis
Agronomic Decision Making
- Work alongside operator to develop planting, fertilization, and pest-control strategies
- Share and encourage best practices from experience managing thousands of acres with dozens of operators
- Monitor farming practices and identify and mitigate problems early to protect landowner interests
- Identify farm improvement opportunities to increase crop yields and land value
- Analyze pay-back and return on investment
- Partner with operators to reduce direct landowner cash costs
- Identify appropriate government and conservation cost-share programs
- Solicit competitive bids and project-manage all activities and contractors
Marketing (for crop share and custom leases)
- Develop and execute grain marketing (sales) plan customized for landowner cash flow needs, tax planning, and risk appetite