Investors looking to profit from increasing farmland prices can gain exposure through Farmland Partners Inc. (FPI, Financial). The company buys up farmland then rents it out to professional farmers. Farmland Partners currently enjoys a monopoly as the only publicly traded REIT with a portfolio devoted to farmland. Since the April 11, 2014 IPO, the stock price has jumped from an opening day low of $12.50 to the current price of $13.65 a share.
Investment Strategy
Farmland Partners purchases choice farmland throughout North America that is suitable for growing row crops such as corn and soybeans. Each parcel is analyzed based on its location, the soil type, historical crop yield, water availability, weather pattern and other factors to judge its suitability. The company looks for farmland that will steadily increase in value and is capable of producing yearly crops on a long term basis.
Profit Strategy
Farmland Partners earns income by leasing its farmland to experienced farmers. The leases are from one to three years long and mostly triple net leases, which makes the farmer responsible for paying the taxes, the land maintenance expenses and the water bill. To protect its interest, Farmland Partners usually requires that farmers pay the annual rent up front before the planting season begins. This investment strategy ensures the company’s income does not depend on the farmers having a successful growing season.
Current Portfolio
Farmland Partners currently owns 38 farms scattered throughout North America. Since the April IPO, the company has entered into an agreement to purchase the 3,696 acre Burlington, Colo., farm for approximately $8.75 million. If the scheduled May 2014 closing goes through, Farmland Partners will own 33 farms in Illinois, four farms in Nebraska, two farms in Colorado and an interest in three grain storage facilities.
Current Risks
At this time, Iowa, Kansas, Minnesota, Missouri, North Dakota, Oklahoma, South Dakota and Wisconsin prohibit REITs from purchasing and owning farmland. Since these states are major agricultural producers, this significantly hampers Farmland Partners from expanding its holdings. As a counter measure, the company can purchase farmland in Canada’s major agricultural provinces of Manitoba, Saskatchewan and Alberta.
Another important consideration is the rising price of oil. Oil is used in fertilizer production and is vital to farmers who must get the maximum yield out of the spring planting. Farmers who do not net enough income or show a net loss may not be able to afford a triple net lease. In this case, Farmland Partners would have to sweeten the lease terms that, while generating less profit, would keep the land rented.
Long-Term Opportunity
With the world’s population expected to hit 10 billion in 2050, Farmland Partners offers investors the opportunity to profit from rising food prices. CEO Paul Pittman has extensive knowledge and experience with agricultural real estate and knows how to manage the company’s extensive portfolio. Purchasing and consolidating smaller farms into larger farms is more cost effective than trying to oversee numerous small parcels. Since U.S. crops are globally competitive, the increased demand for row crops makes Farmland Partners’ stock a long-term buy and hold.
Disclosure: I have no position in Farmland Partners and no plans to initiate any positions within the next 72 hours.
