If you’ve ever rented an apartment, think about how much time and money you invested in improvement projects. You probably didn’t even paint a wall, let alone install solar panels or add a new wing.
Farmland ownership is imperative for America’s farmers and future food security because active landowners have incentive to improve their underlying asset. Farm owners must invest more and for longer periods than they have in the past.
U.S. farmland is some of the most productive in the world, but farmers will need to increase productivity to meet future demand. By the year 2050, the world will need 50 percent more food, while cropland is only estimated to increase by 13 percent worldwide during that time.
Yet farmland ownership is in decline.
According to the USDA, of the remaining 2 million farms in America, nearly 40 percent are leased to farmers by a third party — wealthy individuals, corporations, or even foreign countries. Everyone from Bill Gates to China recognizes agricultural land is a great investment. The agricultural industry is a nearly 3-tillion-dollar market.
And while we need more institutional capital in agriculture, there is a knowledge gap between investors and the long-term approach needed while investing in rural America. Because institutional investors do not understand farming, they don’t always incentivize agricultural producers.
To solve the food demands of tomorrow, capitalism can drive innovation and reverse the decline of active farm ownership. To do this, investors and farmers need to align their interests, so farmers benefit financially from the long-term health of the farm asset they operate.
Problem with short-term leases
Anyone who has rented short-term housing understands the pitfalls associated with leasing — landlords can hike up rent year over year — or worse, they can cancel a lease with little notice. Passive landowners create leasing terms typically favorable to the landlord without a long-term view to support the farmer who works that land.
But promoting soil health and increasing crop yields takes time. Farmers investing in sustainable practices (like cover crops and no-till) and new technology (like precision agriculture) need huge infusions of capital to establish the infrastructure — and years to see a return on the investment.
That would be like asking an apartment tenant to invest in their landlord’s new roof and plumbing.
As operators who already work within confined margins, tenant farmers are discouraged from investing in their landlord’s asset. Like a homeowner putting sweat equity into the value of their home, the only answer for the future of farming is a personal stake in the land itself.
But with few alternatives, leasing is some farmers’ only option. Without a solution, we might have an entire generation of short-term tenant farmers.
The farmer pipeline problem
Over 60 percent of farmers are over 55 — which means more than half of American farmers are getting ready to retire. But as farmers age out of the profession, the next generation is moving away from rural areas instead of taking over the family farm. We’ve started to see a wall of farmland on the horizon that is going to need new operators.
On the other end of the spectrum are beginning farmers who want to enter the market, but traditional financing loans require a 30-40 percent down payment. That’s a huge barrier to entry for young farmers. And the problem is only expected to get worse. As more passive owners enter the market, the cost of farmland will continue to increase.
This creates a financing problem for farmers looking to take up the mantle of farmland ownership. And it creates an opportunity for investors to entice farmers with short-term leases that don’t provide a path to ownership.
What we’re seeing now is the gentrification of rural farmland. If we hollow out rural areas, the future of food production could be at stake.
Support for the next generation of farmers
Is America and our food supply in a better spot if a majority of farmland is owned by passive owners? I would answer that with a resounding no.
Some passive investment opportunities might always be necessary, but only if done thoughtfully.
If we continue to see short-term leases with no long-term vision for farming, farmland values will continue to price farmers out of ownership. That doesn’t help new farmers, future farming practices, or the associated jobs in rural communities.
We advocate for capital structures that provide a path to equity ownership for the farmer, which can include long-term leases with profit sharing, partnership structures, and long-term lease with option to purchase. With these approaches, both investor and farmer benefit financially from the long-term health and productivity of the farm. That’s good for farmers, investors, and food security.
Brian Philpot is the President/CEO and Principal Owner of AgAmerica (@AgAmerica), the largest agricultural mortgage Real Estate Investment Trust (REIT) in the United States.