Approximately 943 million acres of farmland spanned America in 2000, according to the U.S. Department of Agriculture (USDA). By 2022, farmland acreage had dropped to about 893.4 million.
That’s the equivalent of losing all the farmland in Indiana three times over.
Put another way, the United States has removed, on average, 4.3 acres of farmland from agricultural production every minute of every day for the last 22 years.
Wyoming, Texas, New Mexico, and California lost the most acreage during the period, losing 6.1 million, 4 million, 4 million, and 3.8 million acres of farmland respectively. The states seeing the steepest percentage declines were Hawaii (-23.6%), Wyoming (-17.6%), California (-13.7%), and Nevada (-13.2%).
This shrinking supply in the face of a growing demand for food is one reason why farmland is an attractive investment class. Green Street Advisory Group, which researched farmland investing in 2021, explained the supply side of the equation like this:
“Supply growth is ubiquitous in commercial real estate and oversupply is often the catalyst for downturns. In contrast, U.S. farmland has experienced decreasing supply of available land due to land being taken offline for commercial real estate development, transportation networks, and other uses. Supply may decrease even further in the future with water losses and potential decreases in overall productivity caused by regulations and/or food preferences (e.g., organic farming requires relatively more land to produce equivalent outputs). Farmland is the rare investment opportunity that combines growing demand with shrinking supply.”
For farmland investors, there are several benefits to these supply challenges.
First and foremost, the loss of 4.3 acres a minute has proven to be a major factor in asset appreciation, which boosts overall investment returns. Unlike traditional real estate that can be susceptible to market fluctuations (e.g., residential homes gaining then losing value), farmland tends to gain value each year.
In Illinois – where Farmland Partners owns nearly 40,000 acres – farmland increased in value 6.4% a year from 2000 to 2022, based on USDA data. Farmland values in California, another key state in the FPI portfolio, have grown even faster at 6.5% annually.
Next, the shrinking acres of arable land has made farmland a near “zero vacancy” sector. That is, there are more potential renters looking for farms than there is inventory.
Besides the obvious positive impact this phenomenon has on rental rates, “zero vacancy” conditions improve the quality of tenants available to FPI, usually ensuring that the most productive farmers are the highest bidders for land. It also creates an environment for negotiating favorable lease terms.
Finally, farmland supply constraints position FPI to achieve outsized returns from higher and better uses when non-farming demand for the land that outstrips its farming value.
While our company underwrites and purchases land based on agriculture uses and values alone, certain properties can be coveted for things like renewable energy. For example, FPI’s portfolio currently contains more than 11,000 acres in Colorado and North Carolina leased to wind energy producers. Rent on that property is achieving a more than 35% premium to farm rent alone.
Best of all, these wind projects supplement rather than replace farm rent because agricultural production can continue around wind turbines.
That way, we can take full advantage of the environment created by the loss of 4.3 acres a minute without shrinking the vital supply of farmland further.
Note: This article contains Forward Looking Statements.
