Farmland

What is Farmland?

In arable regions worldwide, farms are constructed in a variety of ways. Farmland is a real estate asset class that combines cropland (to grow crops), pastureland (to house and raise livestock), and timberland (for logging). Farmland is a productive asset critical to many crop and livestock operations. It may appear on the balance sheet as fixed assets or a fixed cost as a rent expense.

Cropland in the US is about 46% operator-owned and 54% rented, while pastureland is 72%/28%[1].  Broadly, operator-owned farmland represents about 60% of the over 900 million acres of farmland in the United States. Considerable portions of equity and debt in many farms trace to this asset class; together, these contribute significantly to a farm’s net worth.   

Rented land is also an investment asset primarily owned by non-operators, including investment funds and institutions. Retired farmers also hold some of their net worth in land, although they make up a minority of landlords. 

Farmland as Capital Expenditure

Farm businesses, whether start-ups to tenured operations, often buy farmland as part of growth capital expenditure plans.   

Valuation approaches, such as the cost approach or direct capitalization, are not the usual ways to determine the purchase price. The sales comparison approach is often used instead, supported by many data sources that are publicly available.  

When disposed of, the book value of farmland will not reflect fair market value. Farmland does not depreciate under accounting standards. Therefore, the difference between disposal price and book values will likely result in a gain on sale when the asset disposal occurs.  

Farmland may also show on balance sheets as capital lease obligations when lease accounting conditions are met; for example, a lease-to-own agreement may be in place.

Farmland as Collateral for Financing

Farmland CapEx is a standard requirement for most farm financing. The collateral exhibits strong qualities that lenders rely on, as an attractive and highly marketable asset, with ascertainable and stable prices.  

The average farm size in the US has doubled to about 446 acres[2] over the past 80 years, with 20% of all farms now over 500 acres. Research by the University of Illinois[3] shows that demand for farmland has resulted in an annualized return above 10% over 50 years (1970 to 2019), exceeding the pace of inflation and return on many other asset classes (e.g. US and European equities and bonds).  

Most lenders will lend against farmland and buildings over longer amortizations (15-30 years) and at a lower interest rate than other forms of secured debt. These lending terms reflect the lower credit risk of the asset class serving as collateral.  

Financing supports growth CapEx for many operators, although some investors will use leverage to buy farmland with a combination of debt and equity.  

Farmland as Investment

According to Savills Research, worldwide farmland was valued at $35.4 trillion in 2020, 9% more than $32.6 trillion in commercial real estate. It is unknown the portion that belongs to primary producers (the owner-operators of farm businesses).

USDA reported US farmland and buildings were valued at $2,734 billion in 2020, rising in 2021 to $2,916 billion[4]. With about 40% not owned by producers, the value of this asset class in the US alone is estimated at $1,166 billion.

Although farmland is lost when development occurs, it stems from development value that far exceeds the raw land value. The prospect of land serving as a potential future development site is an attractive form of optionality to some investors.

The National Association of Realtors markets farmland as a good inflation hedge with consistent returns and lower volatility than non-farm asset classes.  

Qualities of Farmland

• Soil quality is essential whether used to grow cash crops or suitable plants for grazing livestock. 
• Topography leads to different types of farms and different types of challenges. Terrain may be suitable for heavy farm machines, such as terracing agriculture, fruit trees, and other plants.
• Climate, water, and irrigation access will all affect the yield of cash crops and the suitability of the land for grazing.
• Location, including proximity to markets and urban development, are qualities that producers and investors consider.

Additional Resources

Agribusiness

Real Estate

Timberland

Types of Assets

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