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 heart equities. And all this is in my lazy portfolio. But this is not a typical year. In a typical year, you can expect 13% from the S&P 500 (1970-2013).

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 5%-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.

Leave a Comment

24 comments

    • Hi Ed,

      There don’t seem to be any published stats anywhere proving certain times during the year yield the bet deals. Midwestern farmland typically sells during the winter. It’s because the land is dormant and farmers have time to attend auctions. Since farmland tends to only sell once in a generation, the time to buy is when it’s for sale.

      • Yes, you are correct in saying that farmland sells the best during the off-season, winter. Farm land has been an excellent investment for me over the last 28 years. I purchased 1,500 acres of prime (CSR Rating of 85 on a 100 scale, 100 being the best land and can yield 250 bushels an acre. CSR stands for Corn Suitabilty Rating. I paid around $1,500,000 for all 1,500 acres in 1988. It is now worth around $15 million dollars, so it has been a good investment for me. Farmland is a good investment for around 25% of your total investment funds.

        • I have 87 acres in Missouri with a ranch home on the property please let me know if you are interested am going to ask 495k plus buyer pays closing costs

  • Great advice for getting the most out of the land you are buying! It’s a good idea to think about what is a priority for you because you can save so much on land by not having it irrigated but if quality soil is what you are looking for, that may not work for you.

  • Excellent! I look forward to the follow up post. Just now considering a purchase of farmland and are evaluating our ROI. My husband is not yet sold on the idea however, I am.

    • Hey, tohbi. I actually haven’t written a follow-up post. I will soon though since this post is getting a lot of attention. Subscribe to the blog so you won’t miss it!

      • Excellent. My problem is trying to find anything of decent size (100 acres or more) available for sale. I live in Washington State lower Yakima Valley — we have good irrigation system — but no larger parcels come for sale anymore.
        All of it’s in strong hands and tight hands. I am waiting hoping.

        • You’re wise to wait. The bigger the parcel, the easier it is to farm. The easier it is to farm, the more it’s worth. During harvest, it becomes quite obvious how important it is to have large parcels. Too much moving equipment from field to field otherwise. Look at the rich farmers. They all have large fields, rather than tons of small ones.

  • I guess I’m a little late to this conversation, but if anyone is still looking at it–I’m wondering if we should sell farmland. It’s family farmland but no one lives in that state anymore and it has been leased out for years. Someone who leased it has been interested in buying it for at least the last 5 years and has made a solid offer. The headache of keeping it will come when there is no one left to keep an eye on it to ensure it is being properly farmed. Should we sell it now while it is in good shape? I don’t know what issues to consider to make this decision.

  • I bought 90 acres in Guatemala, around $800 per acre. Here it rains enough for not needing irrigation and the sun is warm enough to get 2-3 corn crops a year. My best return was with cattle. A cow gives birth to another cow every 18 months, basically duplicating your investment. Then that cows goes on giving you a cow every 18 months and it looks like a pyramid. I had it for two years and in that time beef went up 50% because more middle class in Guatemala can afford meat and drug lords also buy cattle to get rid of cash or use as mules to send coke to Mexico so it was very lucrative.

    • I (only slightly jokingly) told my family we should sell all our land in the States and move down south where we could get a lot more for our money. Did you sell your herd because it was time to develop the land?

  • Will,

    Great post! Fun reading about this non-conventional type of investing.

    What keeps me from buying farm land (basically any type of land) as an investment is that its future value is very unpredictable. Here in Belgium a lot of people live and die by the saying that land prices only go up-up-up, which seems to be true since the 1950s.

    In the 19th Century, however, land nobility in Europe lost huge amounts of wealth and status due to the industrial revolution. Fewer land and workers were needed for a bigger output, which reduced the demand for land and thus the price.

    Don’t want anything like that happening again to my investments!

    NMW

  • Very interesting! I had no idea farmland was that expensive. The land we’re looking at buying in Vermont is wooded acreage, so it’s vastly cheaper (even though there’s usually some timber value to be realized through selective logging).

    • We have some wooded land where we practice selective logging. That and we get firewood from the same land. And we rent it out to cattle herds. And it’s pretty.

      You’ll love it!

  • Wait, John Wayne memorabilia is not a good investment? *looks at storage room full of JW memorabilia… lights it on fire* Time to find something else then! 😉

    All jokes aside, this is a cool series, Will! Only 1% of people own America’s farmland (if 300 m. people in the US…)?? Wow! I thought it would be more. Very curious to see a continuation of this series. I know nothing about farmland or buying farmland, so this is really interesting!

    • Yeah, and only about 1% of people born in the US grow up on farms. So I though, ‘Well that makes me and this blog a little different.’ Different is worth writing about…

      There used to be way more farmers but with growing machinery it takes less people to farm the same number of acres. When it comes to harvest, 1 man in a 12-row combine today can harvest more corn than 22,000 people could have 80 years ago. NPR, ftw.

  • Nice piece! I agree that farmland can be a great investment in addition to other revenue streams.

    • I haven’t concluded my research yet. 😉 The verdict is still out if I’ll actually buy any.

      • On Nov 20th 2014, you wrote “In the next post I’ll investigate how to make the most money possible per acre of farmland you buy.”. Since then you’ve provided a couple of updates indicating you’re still analyzing the farmland investment question. It’s now nearly a year later. Did you publish an update and if so where? If not, do you plan to.?

        • Hi Mike,

          I actually have the next post outlined in my head. I have answers for the questions I posed at the end of this post. It will take me some time to publish it but when I do, I’ll link to it at the end of this post. I’ll try to get it live within a month. Sorry for the delay!