This article is part of Fortune’s quarterly investment guide for Q2 2021.
Bill Gates owns more of this investment than anyone in America.
It’s also how fellow multibillionaires Jeff Bezos, Thomas Peterffy, and Stewart Resnick choose to diversify their personal portfolios.
It has generated low double-digit returns with near-boring consistency for eight decades, and its performance is completely uncorrelated with U.S. stocks and bonds, both of which are wildly volatile and dangerously pricey right now. Nothing is a better hedge against inflation that’s suddenly looming, since what it produces fills a big part of the basket of household staples whose prices are rising. This business is so seemingly unglamorous as to be glamorous. In Wall Street’s view, it’s as corny as Kansas in August and as sexy as a pair of bib overalls.
That barnyard hint probably led you to the right guess: It’s American farmland. Few Main Street investors are planting any part of their savings in the soil, but they should be. Because investing in the farms that grow our tomatoes, squash, and blueberries, and the grain that feeds livestock offers strong long-term returns that sprout as reliably as fall harvests, but don’t suffer nearly as much as stocks and bonds in stormy times.
As an asset class, U.S. farmland boasts a total value of $2.7 trillion, approximately what all office buildings and rental apartments are worth separately. Overall, it has delivered 11% annual returns over the past 85 years: half from rental income, and half from appreciation of the land. That’s slightly better than the S&P 500, and year in and year out, farmland’s gains were much more consistent than for big-cap equities. Since 1970, the earthy asset class has beaten inflation by 6.1% a year, according to research by professor Bruce Sherrick of the University of Illinois. Farmland plowed through the Great Financial Crisis unscathed. While equities dropped by 20% from early 2007 to mid-2011, farmland went its own way, climbing by one-fifth in value.
Still, around 1% of the dollar value of all farms are owned by funds or publicly traded companies that offer small investors or high-net-worth individuals, or even institutions such as pension funds the opportunity to invest. The U.S. has only two farmland enterprises whose stocks trade on exchanges. The largest is Gladstone Land (ticker: LAND, market cap: $540 million). The U.S. also has a number of private farmland managers. Among the biggest are Nuveen, which manages $4 billion in U.S. farmland, and Hancock, which oversees a $3.7 billion portfolio. In total, only around $26 billion in U.S. farmland is owned or managed by institutions.
This doesn’t include holdings by wealthy individuals such as Gates and Bezos. Gates’ holdings of 242,000 acres in 19 states are estimated to be worth over $5 billion.
A groundbreaker to watch is Farmland LP, America’s largest investment manager of organic farmland (you can find out more about investing with them here). It’s following a highly individual strategy: purchasing at good prices high-quality ground that was mainly devoted to industrial production of commodity crops such as corn. Farmland LP then transitions the spreads to higher-value harvests. Today, its 40-crop menu encompasses wine grapes, blueberries, and a full array of organic vegetables and grains. That produce garners a big premium from grocery chains, vineyards, and food manufacturers whose customers increasingly prize what’s natural, healthy, and grown under strict green standards.
Farmland LP now manages 15,000 acres of organically cultivated land worth $175 million, comprising 12 farms from 64 to 6,000 acres concentrated in three clusters in Northern California and the Pacific Northwest: the Golden State’s San Joaquin Valley, a hour’s drive east from San Francisco; the fertile Willamette Valley south of Portland, Ore., home to grapes for Pinot Noir; and Walla Walla in southeast Washington. These areas offer the most diverse farming in the U.S., as home to over 300 different crops.
Its model clearly works, but investors need an extremely long horizon to profit. Farmland’s first fund that raised $35 million in 2011––and bought $50 million in farmland––is, believe it or not, a 30-year vehicle. So far, it has delivered annualized returns of around 10%. Investors can sell their shares at values based on the appraised value of the farmland every six months. “But 95% of the shareholders have stayed in,” says CEO and founder Craig Wichner. Those 10% gains sound modest, but Farmland delivered them with only one-third leverage. That’s less than half the typical level for office, apartment, and warehouse projects. And its returns are extremely steady.
The funds are structured to back-load the bumper returns. For the just-launched second round that now holds over $90 million in land under management, and initially runs eight years, Wichner expects cash payouts to reach 11% by 2028, and land prices to substantially appreciate owing to the increased cash flow. The income farmland generates is based on the value of crops grown on that land. By converting from low-income to far more lucrative crops, Farmland greatly increases cash flow per acre, an upgrade that also makes the land more valuable.
Investors must hold their shares for the full period. Then they are free to sell and reap the capital gains from the run-up in land prices, or stay in the fund to receive payouts. Farmland would compensate the departing investors either by selling farms, or by adding debt on existing properties. That’s comparable to refinancing your house with a small mortgage when its value jumps in a great market. Or investors can retain their stakes after the fund’s initial term and keep collecting rising dividends, plus benefits from what should be a steady ascent in prices.
Farmland’s success raises the question, if its formula is so terrific, why aren’t lots of funds using it? “It’s a difficult model to implement,” says Sherrick. “Organic soil is very location and soil specific. You can’t grow corn in Canada, nor convert central Illinois to blueberries and wine grapes.” He notes that Wichner chose the Pacific Northwest in part because its climate welcomes such a wide spectrum of crops. You also need patient investors because it takes so long to win the USDA’s organic seal of approval. Under the agency’s guidelines, no farm can be certified until at least three years after it last deployed conventional farming materials such as chemical pesticides and herbicides. Hence, going organic requires patient investors willing to receive no cash flow over the first three years.
The complexity of taking a farm from a blanket of industrial corn to a mosaic of alfalfa, green beans, and olive trees is a costly, complicated endeavor. “It’s a big undertaking to, say, convert wheat fields to vineyards, as Wichner is doing in Oregon,” says Sherrick. The advantage, he adds, is that folks will pay much higher prices for that bunch of fat red tomatoes or packages of juicy strawberries stamped “organic” versus the conventionally grown veggies and fruits in the next grocery bin.
The pandemic lockdown is giving organic a big lift. “Before the COVID crisis, Americans consumed 50% of their food in restaurants and 50% at home,” says Wichner. “In the lockdown, it shifted to 70% at home.” As people bought more items online or visited the neighborhood Whole Foods to serve organic string beans and squash at their dining room or kitchen tables, the trend toward learning where and how the items are grown accelerated.
Consumers who used to check for calories are eyeballing products for the “organic” or “regenerative” labels, the latter a designation awarded by non-GMO and other independent rating organizations. The trend has sparked booming sales and prices for organic produce; Sherrick reckons that the swing to at-home dining and craving for healthier choices will persist in the post-COVID world.
Wichner, 51, got his baptism in real estate while managing apartments with his dad, a physicist who spent nights and weekends changing toilet plungers and fixing garage door openers. Wichner’s mom launched and ran a real estate agency. Wichner became a serial entrepreneur, founding a biotech company that developed an FDA-approved drug for metastatic cancer, and later starting a successful software enterprise that developed and sold automated charitable contribution programs to companies.
But the Great Financial Crisis changed Wichner’s quest from pursuing venture capital to unearthing bedrock, undervalued assets. “In 2010 at age 40, I put my love for VC in a little childhood memories box, and changed course,” he says. “Interest rates had soared, creating a ‘credit event’ that sent asset prices down across the globe by 40%.”
Wichner sought an asset class highly resistant to future credit meltdowns. It fascinated Wichner that farmland values appeared impervious to the carnage in the housing and financial markets. By mid-2009, a metric ton of soybeans was selling at the same price as in the flush times of 2007. “Agricultural prices don’t depend on the fickle course of interest rates, but largely on how much vegetables and meat people are eating, which is as stable as rates are volatile,” he says.
To study how the business worked firsthand, he made a road trip to rural Oregon with three ag experts who were close friends. In that bucolic setting, he talked to farmers on their spreads and over beers in the local pubs. “We’d be looking at a farm, and farmers would walk up, and they weren’t communicative. ‘Who are you guys?’ they were thinking. Then, when they saw how interested and knowledgeable we were, they’d hold forth at length on everything from local crop conditions to global markets.”
The insight from his “back 40” market study: Although regular land cultivated traditionally was a good investment, farmers and owners weren’t getting nearly the income and appreciation available if they shifted to the highest and best use. “Most of the farms were owned by the children or grandchildren of farmers who’d moved to cities,” he says. “They were leasing the acreage, and not investing in things like better irrigation.” Then, as today, most of the farms were growing two crops, industrial corn for livestock feed and ethanol, and soybeans, sold for also for animal feed as well as oil. “Even today, 53% of all acreage is in those two crops,” says Wichner.
A better rotation
Farmers might plant corn for four straight years, rotate to soybeans in year five to temporarily banish the bugs devouring the kernels, then switch back to corn. “The dominant goal in U.S. farming is to maximize operating efficiency by having one farmer on one piece of land growing as much corn as they can and shifting to soybeans when they have to,” Wichner explains. That model relies on heavy use of chemicals. The longer a field stays in one crop such as corn, the bigger the blizzards of insects that attack. “If you grow the same crop year after year, the pests that want to eat that crop explode like you’re offering an all-you-can-eat buffet,” he says.
Besides the pesticides required for bug control, farmers need to use loads of nitrate-based fertilizers to enrich the soil with nitrogen. That’s because the ground constantly planted with corn gets depleted of the nutrients needed to promote growth sans chemicals. In the past, those nutrients came naturally in a cycle of growing different plants in different years, so that the decaying leaves, stalks, and roots left over from harvesting fortified the soil. In contrast to corn, which has shallow roots, deep grain or pasture crops pull nutrients from deep in the ground to replenish topsoil.
For Wichner, the big money wasn’t in commodity corn or soybeans. It was in vegetables and grains that commanded higher prices at the supermarket even if grown conventionally, and became super-profitable if labeled organic. “Only 1% of U.S. farmland is planted organic, but 6% of the demand for food is organic,” he says. “To actually meet that demand and fill the grocery stores with all the organic tomatoes, blueberries, and everything else people want, the U.S. would need to switch $80 billion in farmland to organic cultivation.” It was that big imbalance that lured Wichner. Today, USDA-stamped “organic” sweet corn, tomatoes, squash, and sundry other produce command a 50% to 200% price premium over chemically grown choices.
The prices for organic vegetables and grain were so much higher than for corn and soybeans, Wichner reckoned, that switching to high-value crops would multiply the revenue previously reaped from the same spreads.
For Wichner, the upfront costs of replanting farms and spending three years getting the organic seal meant that his new venture could only succeed if he went big. Only by amassing at least $50 million in farmland could he achieve the needed economies of scale in management, purchases, and investments in the likes of new wells and drip irrigation. His first fund, raised in 2011, provided the necessary capital. He then embarked on a new template for transforming one-crop, industrial farms to a panoply of pricey crops by inspired by cultivation the old-fashioned way.
His template was the “four-field” rotation system developed in the 1700s by the British. It remained the reigning practice until the rise of chemical nitrates following World War II. “The central concept was bringing livestock back to cropland,” he says. In this model, at any one time farmers would always keep two fields in deep-rooted grasses, clover, kale, cabbage, or mustard that pull nutrients from deep underground. The cattle and sheep serve as harvesting machinery, devouring the crops that contain those nutrients and spreading waste that enriches the soil with high-quality fertilizer. “It’s a wonderful close-loop system,” says Wichner.
The other two fields are planted in vegetables and grain. All four rotate over time to the other crops. The cycle goes from the pasture regenerative phase to the vegetable phase to grain. Then the rotation starts all over again with pasture. That’s the age-old template for regenerative agriculture.
That progression provides healthier soils that generate healthier plants, and yield the highest possible revenue per acre by going from industrial to artisanal, all on a big scale. Here’s how the organic economics work down on the farm. Land planted in corn that switches to soybeans every few years typically generates around $1,000 an acre in annual revenue, and rents at $300 an acre. Farmland LP often purchases those industrial spreads in the $12,000-an-acre range. It leases around two-thirds of its land to local farmers, and farms the other one-third in-house. Its full-time staff of 45 manage the rented acreage, and do all the planting and harvesting on the self-farmed land; those are Farmland folks running the tractors.
Keep in mind that farms generate minimal income during the three-year transition period. But once they’re reborn as organic, the ground turns golden. For land planted in vegetables such as tomatoes or green beans, revenues can jump to $3,000 or more, and rent at $700. Farmland’s most lucrative land comprises the 1,200 acres planted in so-called permanent gourmet crops such as wine grapes, hazelnuts, and blueberries; it’s a big blueberry supplier to famed retailer Driscoll’s. Wine grapes produce $8,000 to $10,000 an acre in revenues, while organic blueberries generate $30,000 or more. “You’ve got permanent cropland that was worth $10,000 an acre in corn, and switching to wine grapes raises it $40,000,” says Wichner.
A classic Farmland makeover is its 4,200-acre farm north of Tracy, Calif., in the San Joaquin Valley. When Wichner bought the property eight years ago, it was growing mainly alfalfa, a forage crop sold to dairies, for five out of every eight years; switching for two years to industrial corn; and then a single year to tomatoes. “The property had some of the oldest water rights in California, dating from the 1870s. We’re modernizing the irrigation system by converting from flood irrigation to drip, which increases yields. That’s hugely beneficial in raising organic production of vegetables and permanent crops,” says Wichner. In the initial phase, Farmland LP planted 2,500 acres in pastures, leasing to sheep and cattle farmers.
It has since converted over 1,700 acres of that land to organic green beans, cucumbers, tomatoes, sweet corn, and more—what Wichner describes as a “supermarket basket of vegetables.” That land is leased to sundry tenant farmers. Another 150 acres is planted in organic blueberries, and Farmland is in the process of converting a second 150 acres, with 300 more to come. The medley includes 300 acres of another lucrative “permanent” crop, almonds. Perhaps the most creative choice was taking poor-quality soil that wouldn’t grow vegetables and planting olive trees that thrive on those unpromising acres.
In these times of careening stock prices, obsession with the glamour of Bitcoin, and spiking rates, farmland provides the kind of comfort food wary investors should be looking for.
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