The biggest investment opportunity you've probably never heard of
FarmTogether CEO Artem Milinchuk says two of the investors in his farmland investment company are the Ukrainian co-founders of Grammarly.
Forbes | 2 December 2018
The biggest investment opportunity you've probably never heard of
by Nav Athwal
Is farmland the last great untapped asset class? Farmland currently represents an almost $9 trillion market globally with historically high returns and low volatility. A growing population driving demand for high-quality food coupled with a finite and decreasing supply of land means that farmland will only become more essential over time. Savvy institutional investors are beginning to take notice, but for most investors, the farmland market remains fragmented, confusing, and costly to enter.
New applications of technology have the potential to make farmland a fully-fledged asset class akin to real-estate. Companies like FarmTogether make it simple for an average investor to diversify their portfolios with access to vetted farmland deals.
FarmTogether was founded by Artem Milinchuk, who spent over a decade working in finance around food and agriculture. Artem founded FarmTogether to overcome the barriers he experienced personally and professionally while trying to invest in farmland. I had a chance to sit down with Artem to explore this untapped opportunity further.
In 2016 my friends and now current investors, the co-founders of Grammarly, reached out for help deploying their hard-earned savings into something that was stable and long-term.
“Invest and forget,” as they say.
I recommended farmland, but, to my surprise, I found very few options for non-institutional investors and none that truly incorporated the amazing technologies developed over the past years. FarmTogether is really a product that I’m building for myself, for my friends and for many other people who crave that safety and stability.
Farmland has historically been a great bet. For the past 47 years, US farmland has yielded returns of over 10%. This performance is even better when considering only the last two decades. From 1992 to 2016 farmland yielded an impressive 12% return vs. real estate (NCREIF) at 8.7%, and the Russell Stocks Index 3000 at 8.8%.
Moreover, farmland is a stable investment with little volatility. It negatively correlates to other asset classes, meaning that land prices generally have increased as stocks and bonds have fallen and vice versa. This makes it a smart addition to any diversified investment portfolio.
How big is this market/opportunity?
It is massive, Nav. In the US alone it is a $2.5+ trillion market and, according to our estimates, a $9 trillion market globally. This is larger than all gold ever mined (~$7 trln) or the global professionally managed real estate market (~$8.5 trln). As the average age of farmers in the United States approaches 60, unprecedented amounts of land are set to exchange hands. Industry analysts expect ~400 million acres to change hands in the next 20 years making this a great time to enter the market.
Are there any industry markers that indicate that farmland is an interesting long-term investment opportunity?
I think we are in the Goldilocks period of this opportunity right now where the market isn’t too thin or too saturated, but just right. Forward-thinking institutions and foreign investors have blazed the trail by significantly increasing their investments in farmland over the last 13 years. According to Valor Advisors, between 2005 and 2017, the number of global investment funds specializing in food and agriculture assets jumped from 38 to 446, with current assets in excess of $73 billion.
Farmland has also been attracting such sophisticated investors as Bill Gates and Michael Burry (the founder of Scion Capital made famous in “The Big Short”).
How does farmland look in the overall portfolio?
Farmland is an excellent addition to any investment portfolio. It is inflation-resistant and contra-cyclical to many conventional equity investments. Most importantly, it is a real asset that will always maintain some level of intrinsic worth. I will be putting my parents’ and grandparents’ savings into our products and sleep soundly.
What are the main risks of investing in farmland?
Like all investments, farmland does have inherent risks. Most common risks are overpaying for land and not understanding the prevailing lease rates and their drivers in the area - both can lead to sub-par returns. We mitigate these risks by being conservative in our underwriting and partnering with highly experienced farmers and farmland investment managers.
One common misconception is that farmland is highly volatile due to the volatile nature of the crops. While certainly long-term prices on a particular agricultural commodity will influence farmland returns, it is just one of the factors. At FarmTogether, we lease out the land, not operate it, so we do not bear the operating risks nor reap the rewards that a farmer does.
Think of it as if you were renting out a property to a coffee shop - your rent doesn’t change with the global coffee bean prices or revenue of the shop. However, if the coffee shop continuously does poorly then the owner might decide to prematurely terminate the lease. You’ll have to find another tenant and renegotiate the lease. In our case, given that the supply of farmland is decreasing while demand is growing, we see positive long-term tailwinds for land prices and lease rates.
Lastly, we always recommend diversification across crops and geographies.
How does farmland investing impact the farmer?
Part of the reason I’ve started FarmTogether was to help farmers. They are hard-working and very smart people - true entrepreneurs - I am thankful for the privilege of working with them. Access to land and capital are the largest barriers facing farmers today. This means that farmland investors can lend substantial support to farmers looking to expand their operations in a flexible and capital-light manner.
So why aren’t more investors betting heavily on farmland?
Part of the reason is just lack of awareness and access and FarmTogether will change that in the coming years. Secondly, the market is fragmented, geographically constrained, and often requires specialized knowledge to effectively find and manage land. Small and medium-sized investors, in particular, have struggled to enter the market due to high barriers to entry.
How can I invest in farmland?
FarmTogether allows direct investment in high-quality institutional-level farmland and we plan to make this offering available to accredited investors in early 2019 and potentially to everyone else in 2020 - 2021.
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