The U.S. has approximately 911 million acres of agricultural land, excluding Alaska and Hawaii, as per the U.S. Department of Agriculture. In 2022, the average price of an acre of cropland in the United States touched a high of $5,050. In contrast, in 2008, this price stood at $2,760.
Typically, farmland is used for raising livestock and growing crops. Now, a farm may be a small, single-family operation or a large farm complex with different types of crops and livestock. The value of a given patch of farmland will depend on its location, size, fertility, access to markets, etc. The return on investment from farmland may also vary depending on several controllable and uncontrollable factors.
So, are you looking to invest in farmland? If yes, there are several important things to consider before investing.
Six Key Things To Consider Before Investing In Farmland
The first thing to be clear about before investing in farmland is your intended purpose for it. Do you want to rent out the land to farmers or third parties, or do you want to grow crops yourself? If the latter, you also need to have clarity about the types of crops you wish to grow, the revenue you are projecting and so on.Investing in farmland is no easy task and in many cases can directly impact your lifestyle. Hence, make sure the purpose of your investment is clear and backed by research.
Another important factor to consider before investing is the location of your farmland. For instance, ranch land may be a good choice if you want to breed cattle and livestock. On the other hand, cropland may be a suitable option if you wish to cultivate crops. Also, you might want to study whether the farmland is in a relatively low-lying area and other such factors.Also, location can directly impact access. For instance, are markets and local stores close by? Is transportation viable for the delivery of crops? Farmland that is far from access can increase production costs and directly impact revenue.
3. Water And Soil Conditions
A crucial factor you should consider when buying farmland is the location of water sources and the condition of the soil. Reliable water supply and irrigation systems are essential for producing high-quality harvests. Also, remember that different crop types can require different soil conditions.
4. Demand And Price Cycles
The profitability of farmland is largely driven by demand and price cycles, which in turn are influenced by several macroeconomic factors. It can also vary significantly from year to year, as well as from one state to another.
If the demand for a certain crop is high, you as an investor, or the farmers you have rented your land to, can see good returns. The opposite also holds true. The volatility and sensitivity of crop prices are key to determining your returns from a patch of farmland and should be taken into account before investing.
5. Climatic And Geological Conditions
There is a quite obvious connection between the climate and the income you can generate off farmland. For instance, a drought-like situation in a particular region will significantly hamper the yield from any farmland there. Moreover, if a particular state is prone to earthquakes or other natural disasters, you ought to account for that, as well.
It is thus necessary to study the climatic and geological conditions of the farmland you are investing in. It would also help to analyze local environmental conditions.
6. Production Costs
If you plan to cultivate crops, you will need access to all sorts of machinery, tractors, tools and equipment. And if the farmland is sizable, there can be considerable labor costs, too.
Therefore, to make the best of your land, you need to calculate beforehand the costs you will probably incur in maintaining and using it.
Farmland can be a good addition to an investment portfolio, but as with any other asset class, knowing when and where to buy is key to a successful investment. The ROI from investing in farmland can be influenced by several factors, as mentioned above.
As with all investing, do your research before you invest. You might also want to consult your financial advisor to better understand the intricacies of investing in farmland.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.