The Trouble With Agricultural Farmland “Investment”
Is buying farmland a good investment? Farmland investment has been booming over the past few decades. In fact, according to the USDA, there are now 5 million vacant acres of American farmland. This is great news for those looking to buy property in rural areas, but it’s causing problems for small farmers.
Land prices are skyrocketing because of investor interest. While some people see farmland as a way to make money, others use it to grow crops and sell them directly to consumers. But since the majority of farmland is owned by corporations, big companies like Walmart and Tyson Foods control most of the supply. So, while you might think that investing in farmland is good for everyone, it actually benefits just a select group of people.
In addition to being able to purchase farmland cheaply, investors are purchasing existing farms and leasing them out. This allows them to reap profits without having to invest anything themselves. And since the leases don’t expire, the owners aren’t required to maintain the land. If they fail to do so, the leaseholder takes full responsibility.
This creates a problem for smaller farmers. When someone buys a farm, they often end up owning the land outright, meaning that the farmer no longer owns what he grew. As a result, the farmer loses his ability to negotiate fair terms with buyers. Plus, the farmer doesn’t benefit from the increased demand for his product.
Where the opportunity is
Agricultural land is scarce and will likely continue shrinking in size. This is why investors are increasingly looking to buy farmland. In fact, farmland investment has grown by over 50% since 2013, according to Farmland Partners. But what does it mean for landowners who want to sell or lease their properties? And how do you avoid paying hefty capital gains taxes if you decide to sell or lease within the next decade?
Landowners who sell or lease land face significant tax consequences. If they choose to sell or lease their property within the next ten years, they must pay capital gains taxes on the difference between the sale price and the original purchase price. For example, if a farmer bought his farm for $1 million and sold it for $2 million, he would owe capital gains taxes on the $1 million profit.
The good news is there are ways to minimize the impact of selling or leasing your land. First, make sure you’re aware of the rules. Second, consider whether you’d rather keep your land or receive some sort of compensation for giving up ownership. Finally, consult with a qualified real estate professional about your options.
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What drives farmland returns?
Farmland values have increased dramatically since the 1960s. But what factors have contributed to those gains? While inflation has played a role, it’s not the sole factor behind land price appreciation. Rather, there are many reasons why farmland prices continue to rise — including government policies, technological advancements, population growth, and changing consumer preferences.
Inflation has been an important factor driving farmland value increases over the longer run. For example, according to USDA data, the average farm acreage price per square foot rose from $3.42 in 1966 to $14.81 in 2018. This increase represents a compound annual growth rate (CAGR) of 5.6%, which is well above the 2% inflation rate during that same period.
But while inflation has driven up farmland prices, it hasn’t always been the primary force. As we mentioned earlier, land ownership has become increasingly concentrated among fewer landowners. And in recent decades, the number of farmers has declined. These trends have led some economists to conclude that the main reason farmland values have risen is because of changes in demographics and technology.
1. Landownership Concentration
The concentration of farmland ownership has changed considerably over the years. From 1900 to 1950, about half of American farms belonged to families. By 2000, however, that figure had dropped to just one-third. Today, roughly 70% of all farms are owned by family members.
This trend toward greater landowner concentration has happened across the United States. Between 1970 and 2010, the percentage of farms owned by individuals fell from 49% to 36%. At the same time, the percentage of farms controlled by corporations grew from 7% to 19%.
As you might imagine, this concentration of land ownership has implications for how much money landowners make. A study published in 2016 found that the median income of owners of small farms decreased by 25% between 1980 and 2012. On the other hand, the median income of large farm owners increased by 60%.
2. Land value
The average price per acre of land increased by 5% in 2018 compared to 2017. This increase is due to several factors including population growth, rising demand for housing, and the growing popularity of urban living. For example, according to the USDA Economic Research Service, median home prices rose 8.4% nationwide in 2018.
In addition, the number of households in the United States grew by 2 million people in 2018. These trends indicate that more Americans will require homes, and therefore there will be greater demand for land.
Farmland is one of the best investments you can make because it is relatively safe and provides a reliable source of income. Investing in farmland is like investing in a bank account. You don’t see much interest earned, but you know that every month you receive money based on how many acres you own. If you invest $10,000 in farmland, you will likely receive around $1,500 each year.
However, if you invest in stocks, bonds, mutual funds, or real estate, you will probably earn less than half of what you could earn by purchasing farmland.
If you are looking for a way to diversify your portfolio, farmland is a great choice. Even though farmland doesn’t provide high returns, it is still a good idea to invest in farmland because it is safer than other types of investments.
Crop yield
Farmland yields increase with rising crop prices. This is because farmland tends to rise along with food costs. In fact, there are several reasons why farmland values tend to rise alongside food prices.
One reason is that people often use farmland to grow food for themselves and their families. Another reason is that farmers often sell their produce directly to consumers, rather than selling it to middlemen like grocery stores. These factors mean that farmland values tend to rise alongside food prices.
Tax benefits
Farmers are often encouraged to buy land because it helps boost agricultural production. But some states offer tax incentives for those who do just that. In California, for example, farmers who purchase farmland can deduct up to $25,000 per parcel from their state taxes. And in New York, farmers can claim a deduction based on the value of the land they sell.
Land trusts are another way for farmers to protect their land without selling it outright. A trust allows landowners to transfer ownership of the land to a nonprofit organization, which then manages the property for the benefit of future generations.
Land trusts typically charge annual fees to maintain the trust, but they don’t pay out dividends as a regular corporation does. Instead, the money goes toward preserving open space.
In addition to helping preserve land, donating land to a conservation group can help you save money on your taxes. If you give away land to a qualified 501(c)(3), you can write off the full fair market value of the donated property. You’ll also avoid paying capital gains taxes on the appreciation of the property over time.
Passive Income
Investing in real estate provides a steady stream of passive income. You don’t have to do anything to earn it. This type of income allows you to invest in assets that are likely to appreciate over time while generating consistent monthly cash flow.
Real Estate Investment Is A Great Way To Diversify Your Portfolio. You can use real estate to build wealth and achieve financial independence. When you buy property, you’re making an investment. But unlike stocks, bonds, and some precious metals, real estate generates revenue. And because it’s easier to sell something tangible like a house than it is to sell shares of stock, buying real estate gives you another vehicle for building wealth.
The key to investing in real estate is finding a good deal. If you find a bargain, you’ll make money every single month. As long as you keep expenses low, you can generate positive cash flow even if interest rates rise slightly.
Why You Should Invest In Farmland
Landownership is still relatively rare among individual investors and institutions. But it’s become increasingly popular over the past few decades. Why? Because land is one of the most stable investments around. And while some people view land ownership as a conservative investment because it requires patience, there are many reasons why you might want to invest in farmland. Here are three good ones:
1. Landownership Provides A Safe Return On Investment
Farmland is a great way to make money — especially if you live in a rural area where the cost of living is low. If you buy land, you don’t have to worry about whether the price of commodities like corn or wheat goes up or down. Instead, you just wait for the crops to come in and sell them at market value. This makes land ownership a safe return on investment.
2. Landownership Is Less Volatile Than Other Asset Classes
While stocks fluctuate based on economic conditions, land values tend to remain fairly steady. For example, if you bought farmland 10 years ago, it probably won’t drop much in value over the next decade. Plus, if you’re buying farmland, you know exactly what you’ll get out of it every year. With stock investing, you could end up with a big gain one year and a loss the next.
3. Landownership Offers An Attractive Rate Of Return
The average annual return on farmland is 5.6 percent. That compares favorably to the 2.8 percent average annual return for the S&P 500 Index. While those numbers aren’t mind-blowing, it does mean that you can earn a decent amount of extra cash each year without having to put too much effort into it.
Conclusion
Is Buying Farmland A Good Investment In 2022? Yes! Today, it’s easier than ever before to invest. You don’t have to buy land yourself or even put on your shoes. But investing in farmland isn’t the only way to do it.
There are many online platforms that allow you to invest in farmland and other kinds of alternative investments. Maybe this is the perfect time to diversify your investments in farmland.