Investment Funds are Plowing into Farmland

Investment Funds are Plowing into Farmland  – Here’s Why

Investment funds are buying vast acres of crop and pasture land as they project land values will continue to grow exponentially. What does that mean for independent producers and why is this happening now?

Reuters recently reported that between 2008 and Q2 of 2023, the amount of farmland and agricultural real estate owned by investment funds increased by 231%. The number of acres owned by foreign entities increased 64% to about 40.8 million acres between 2010 and 2021, with the value doubling to about $72.5 billion, according to the most recent USDA data available.

Eric Johnson, co-founder of CJ Real Estate, a land auction company, said that when investors enter the land market it drives up the price per acre establishing a new cost baseline for everyone.

The average age of farmers and ranchers has been rising for years. “Land costs are a substantial barrier for young producers,” said Troy Shelby, President of the Oklahoma Cattlemen’s Association. It’s a significant challenge for family-owned operations. If the next generation doesn’t want to continue the operation, someone is going to buy that land.

Land Values are Growing

Strong demand has been driven by high commodity prices as well as institutional foreign and domestic investment. According to USDA 2023 reports:

  • For U.S. pastureland, the average value in 2023 was $1,760 per acre, a $110 increase over 2022 and a 66% increase since 2009.
  • The average value of U.S. cropland (irrigated and non-irrigated) was $5,460 per acre in 2023, increasing 8.1% from 2022. From 2009 to 2023, cropland value increased 107%.
  • For pasture, the average value at the state level ranged from $490 per acre in New Mexico to $16,600 in New Jersey. The change in value ranged from a 1.5% increase in Wyoming to a 16.2% increase in Kansas. The Northern Plains region (Kansas, Nebraska, North Dakota, and South Dakota) had the highest increase in pasture value per acre at 13.5%.
  • At $155 per acre, the average rate to rent cropland in the United States in 2023 was $7 higher than in 2022. The average rate per acre for irrigated cropland was $237 (up from $227 in 2022) and non-irrigated cropland was $142 (up from $135 in 2022). For pastureland, the average rental per acre at $15 is up $1 from 2022. Among states, the rental cost per acre in 2023 ranged from $34.50 in Oklahoma to $347 in Arizona for all cropland.

Doing More with Less

Some producers say the best way to farm and ranch is the way it’s always been done, doubling down on techniques and values that have served them for years. Savvy farmers and ranchers understand that sustainability is key to improving production efficiency so that they can maintain profitability and meet growing food demand.

Farmers and ranchers today are doing more with less thanks to innovation and technology. In fact, U.S. agriculture would have needed nearly 100 million more acres 30 years ago to match today’s production levels. Smarter equipment, precision tools and biotechnology are helping agribusiness produce more, while using less water, fertilizer and pesticides.

From climate-smart farming practices to voluntary management of forests, grasslands, wetlands and croplands, farmers and cattlemen are not only reducing their footprint, but also are actively absorbing carbon from the atmosphere.

According to the EPA, land management practices alone removed 764 million metric tons of CO2 from the atmosphere in 2018. That is equal to taking 165 million vehicles off the road for a year. And, U.S. livestock emissions are declining thanks to improvements in feed and production and currently make up less than 4% of overall emissions.

Demand for carbon offsets from agriculture has grown significantly in recent years. But the current process is cumbersome, confusing and offers limited return on investment with high transaction costs which limits farmers’, ranchers’ and foresters’ participation. According to a recent U.S. Agriculture Department study, only 3 percent of farmers, ranchers and landowners are using available carbon credit programs that pay them to remove carbon dioxide from the air and sequester it in the soil. Producers who want to participate must hire private parties to help them adopt the right conservation practices and verify that certain processes and protocols were followed in implementing those practices. And accreditation of these private carbon credit management companies is murky at best adding more doubt to an already murky process.

Sustainability Incentives and Assistance

There are a variety of programs designed to help farmers and ranchers incorporate more sustainable practices into their operations. Here are a few of the most active and interesting:

  • Through the Rural and Agricultural Income & Savings from Renewable Energy (RAISE) initiative, the USDA aims to help individual farmers deploy smaller-scale wind projects using USDA’s Rural Energy for America Program (REAP) which provides $144 million in grant funding for underutilized technologies.
  • The DOE is providing $4 million in funding related to REAP, including $2.5 million to support the testing, certification and commercialization of the latest distributed wind technologies including for the agricultural sector, and $1.5 million to support outreach and the identification and development of new business models for farmers to save money and earn income deploying these technologies.
  • The Environmental Quality Incentives Program (EQIP) is a voluntary conservation program that offers farmers and ranchers financial cost-share and technical assistance to implement conservation practices on working agricultural land.
  • AFRI Sustainable Agricultural Systems (SAS) promotes the sustainable supply of abundant, affordable, safe, nutritious, and accessible food and other agricultural products, while enhancing economic opportunities.
  • Equipment Grants Program (EGP) serves to increase access to shared-use special purpose equipment/instruments for fundamental and applied research for use in the food and agricultural sciences programs.

A More Productive Future

Farm and ranch sustainability practices play a crucial role in maintaining the long-term health and productivity of agricultural lands. By implementing conservation measures, landowners can reap several benefits:

  • Improved Profitability: Sustainable practices enhance production efficiency, reduce input costs, and optimize resource utilization. This translates to better financial returns for landowners.
  • Environmental Stewardship: Conservation efforts contribute to soil health, water quality, and biodiversity. By safeguarding natural resources, landowners ensure the resilience of their operations and protect the environment for future generations.
  • Carbon Sequestration: Practices like cover cropping, rotational grazing, and reforestation sequester carbon, mitigating climate change. Agricultural lands can serve as valuable carbon sinks, benefiting both the planet and landowners.
  • Collaboration and Support: Landowners can collaborate with agencies like the USDA’s Natural Resources Conservation Service (NRCS) to access technical assistance, financial resources, and personalized advice. These partnerships foster sustainable practices and address specific conservation goals.

The Long-Term Impact on Land Values

The growing demand for food, renewable energy, and sustainable practices, coupled with limited supply should drive positive tailwinds for agricultural land values over the long term.

Institutional investors know that constants such as global population increase, proportional food demand and urbanization make land investment a stable and profitable investment.

The factors that forge land value are evolving. Independent landowners, farmers and ranchers can make the most of this by diversifying income streams by producing renewable energy, embracing carbon credits, leasing to recreational interests, and incorporating sustainability.

3 Secrets to Buying Exceptional Hunting Land

How to find and acquire prime hunting land for a lifetime of memories.

Picture it: a sprawling 160-acre tract of prime hunting habitat. A place where cherished memories with friends and family unfold over the years. Trophies adorning the walls, and the potential to create lasting family connections that bridge generations young and old. But before you take aim at purchasing hunting land, ask yourself: Are you fully prepared? What should you think about to make your vision a reality?

Meet Eric Johnson, a seasoned land expert with CJ Real Estate. He’s helped hundreds of people just like you find and develop amazing hunting property. Whether you’re after trophy whitetails or year-round sporting, Eric outlines 3 crucial factors to help you realize your dream.

 

1.      Build Relationships

Networking is vital when searching for your perfect parcel. Build relationships with area local landowners and the people that influence is key.

Most landowners want to know that the land they are selling will be taken care of. They’re often concerned that their neighbors will have a good new neighbor when they sell. When landowners know what kind of person you are, and that you’re interested in hunting acreage, you’re much more likely to know about land before it goes on the market.

Local game wardens are another invaluable resource. They are often intimately familiar with public and private lands. They are usually well known to local guides, landowner and business owners.

Not only can they help you find exactly what you’re looking for faster, they can help you properly develop your habitat and introduce you to local landowners that you may not have met.

2.      Hunt What You Know

If you’re lucky enough to lease or have permission to hunt a tract of great habitat already, look for adjacent property to buy. Chances are the landowner of your current tract will help you connect with neighboring landowners.

While that may sound obvious, the real benefit is buying land that you already know a lot about. The knowledge will save you time and money when it comes time to develop the land as you’ll already have a feel for wildlife populations and their patterns, hunting pressure, disease prevalence, predator populations, bad neighbors and many other things that must be evaluated before making a firm offer.

In the process you’ll make a solid financial investment while increasing your total huntable acreage.

3.      Share the Load

Purchasing hunting property with your friends can get a little messy but the pros outweigh the cons when properly organized. There is a lot of work to researching, buying and developing a productive hunting property. Why not share the load with people you trust?

Ask yourself these questions when buying land with partners:

  • Do you have similar goals, budgets and financial stability?
  • Do you have a shared vision for the property?
  • Do you have a clear plan if the situation changes for one or more partner?
  • Do you have a plan for how to share the land?

Buying and building a great hunting property requires patience. Diligently establish local relationships. Avoid rash decisions. Approach your land search pragmatically. When you’ve found some land, bring in experts. Let them help you fully evaluate the land to ensure that the parcel is a smart financial investment as well as a prime hunting tract. The build your dream retreat and enjoy it with friends and family for a lifetime.

1031 Exchanges Grow Ranch Profitability

Cattle ranching can be rewarding and challenging. One of the most significant challenges for many ranchers face is navigating the complexity of taxes. 1031 exchanges are a powerful tool you can put to work increasing profit while reducing your potential tax liability.

Understanding the 1031 Exchange

Named after Section 1031 of the Internal Revenue Code, a 1031 exchange allows you to sell real estate or a business then reinvest in new, “like-kind” property and defer capital gains taxes. So instead of paying taxes on the sale of a property, the profits can be reinvested into a similar but different asset, allowing you to defer paying those capital gains taxes.

Using a 1031 Exchange to Improve or Expand Your Acreage

A 1031 exchange allows you to sell your land and then use the proceeds to purchase a different piece of land without immediately paying taxes on the sale. So, you could potentially sell some or all of your existing ranch and then purchase a larger or better-located one, using the 1031 exchange to defer the taxes on the sale.

Using 1031 Exchange to Improve Herd and Equipment

Livestock and equipment are other assets that may qualify for a 1031 exchange. This means you could sell part of your herd or outdated equipment, then use the funds to invest in higher quality livestock or better equipment. By doing this, you can improve your herd quality or improve operation efficiency while postponing taxes on the profits from the sale.

Meet Jack and Will

1031 Exchange is a powerful tool

Let’s consider an example involving Jack, an Oklahoma rancher. Jack purchases a $1 million ranch and sells it several years later for $1.5 million. That’s a $500,000 capital gain tax liability. But, by utilizing a 1031 exchange, Jack invested the entire $1.5 million into a new ranch gaining more productive grazing land, rich with spring-fed ponds and healthy blue-stem, boosting his profitability and potentially better safeguarding his herd during drought years.

If Jack hadn’t used a 1031 exchange, he would face a capital gain tax liability of $123,750 – assuming a 24.75% total capital gains rate – and would only have $1,376,250 million at his disposal for the purchase of a new ranch.

1031 exchanges become increasingly remarkable as the value of the ranch continues to rise. Of course, it’s not all up-side. Anyone using a 1031 exchange must remember that there are specific rules and requirements and timelines that must be met. For example, there are strict timelines for identifying and closing on the new property. Always work with a tax, financial and/or legal professionals experienced in 1031 exchanges to ensure that you fully understand the potential risks, gains and liabilities and that all requirements are met.

The purpose of this article is to give an overview of the 1031 exchange, highlight key takeaways, and explain best practices for taking advantage of this financial tool. Learn more about in this 6-minute read:

What is a 1031 Exchange?

A 1031 Exchange, also known as a Like-Kind Exchange, is a tax deferral strategy under Section 1031 of the tax code. It allows individuals to defer capital gains on real estate profits by reinvesting the proceeds in another property of equal or greater value within a specific time frame. This exchange helps to maintain the productive use or investment nature of the property.

According to the Internal Revenue Code (IRC) Section 1.1031, if a real property is exchanged solely for real property of like kind, no gain or loss will be recognized. This means that the tax burden is deferred as long as the property is reinvested in another qualifying property. For more information on this beneficial strategy, you can refer to the Real Estate Tax Tip article on IRS.gov. It provides detailed insights into Like-Kind exchanges and their implications.

Benefits of a 1031 Exchange

Beyond the capital gains tax deferral that a 1031 Exchange can accomplish, there are several other reasons why astute investors favor this financial tool. The primary advantage of a 1031 Exchange is the ability to defer capital gains taxes. Through the “like-kind” clause of a 1031 Exchange, the up-leg property must be of the same nature (meaning it must be an investment real estate asset). Like-kind is often misinterpreted as meaning the up-leg property must be the same asset class (multifamily, industrial, net lease retail, office, etc.) as the down-leg property; however, that is not the case. Below are more advantages to executing a 1031 Exchange.

A 1031 Exchange offers various benefits that extend beyond deferring capital gains tax. While the primary advantage is the ability to defer taxes, there are other reasons why ranchers, farmers, landowners and investors favor this financial tool. The “like-kind” clause of a 1031 Exchange requires the up-leg property to be of the same nature, typically an investment real estate asset. Contrary to common misconception, it does not necessitate the same asset class as the down-leg property (e.g., agribusiness, raw land, multifamily, industrial, net lease retail, office). 1031 Exchange benefits include:

Off-Load Management Responsibility

Certain assets can become burdensome due to high maintenance costs, property taxes, insurance, and the need for employees. However, investors have the option to ease their workload by exchanging these properties for less time-intensive assets, allowing them to generate passive income. For instance, if a multifamily owner feels overwhelmed by property responsibilities, they can consider exchanging it for a net lease retail asset that requires minimal involvement.

Consolidate or Separate Assets

One of the exciting possibilities offered by a 1031 Exchange is the ability for investors to enter new markets in the U.S. with high growth potential. Let’s say an owner has an investment property in a highly appreciated market, such as California. With a 1031 Exchange, they could exchange that property for multiple properties in more affordable states, optimizing their cash flow. Additionally, investors can take advantage of income-tax-free states to avoid double taxation (although it’s important to note that some states require investors to pay state capital gains tax.

Depreciation Reset

A 1031 Exchange also provides investors with the opportunity to “reset” the depreciation schedule to a higher value by purchasing a property of greater worth. This strategy presents a significant tax benefit and serves as a valuable tool for increasing after-tax cash flow. It is especially beneficial for those who have fully depreciated their investment and are seeking ways to maximize their financial returns.

Grow Equity and Holdings

The 1031 Exchange is a powerful tool for investors looking to diversify their portfolio and generate higher returns. This tax deferral strategy allows investors to strategically realign their investment goals by exchanging one property for another or into multiple properties of higher value. By doing so, investors can lower their risk profile and minimize exposure to market disruptions.

Step-Up Cost Basis

Another key benefit is the step-up in cost basis that heirs receive when a real estate owner passes away. This means that the heirs inherit the property at its fair market value at the time of death. Not only does this eliminate the depreciation recapture and capital gains tax liabilities, but it also presents an opportunity for owners to exchange into a larger asset while they are still alive, effectively eliminating any built-in gain when passed through to heirs.

1031 Exchange Considerations

While the allure of avoiding capital gain taxes is appealing, there are important factors to consider when deciding if a 1031 Exchange is the right investment strategy. Let’s dive into these considerations and gain a better understanding:

Timelines

In cases where simultaneous closing is not possible (i.e., when the proceeds from the sale cannot be directly invested into the replacement property), investors have the option to delay the purchase of the replacement property. To take advantage of this option, investors must adhere to certain timelines:

  • Replacement properties must be identified within 45 days of closing.
  • Pruchase of replacement property must be made within 180 days of closing.

Failure to meet these deadlines can result in the proceeds from the initial sale being subject to capital gains taxes. To navigate these timelines effectively, a qualified intermediary assists you as they document and manage the process.

Capital Gains

Although a 1031 Exchange is touted as a tax deferral strategy, it’s crucial to note that taxes on capital gains still need to be paid. While federal codes are generally followed by most states, it’s essential to be aware of any state taxes applicable to the exchange property. For instance, Texas might be an income tax-free state, but it compensates with a higher property tax rate of 1.8 percent.

Taxed on the Boot

If the identified replacement property is valued lower than the property being sold (after deducting ordinary transaction expenses), capital gains taxes must be paid. Additionally, accumulated depreciation is recaptured through the difference in the prices of the properties, commonly referred to as the “boot.”

Difficulty Identifying Like-Kind Properties

Finding a property that aligns with an investor’s goals can be challenging, especially within the limited timeframe of 45 days. Failing to identify a replacement property forces the investor to pay taxes on the full gain from the initial sale. To avoid this situation, it is imperative to work with a qualified broker from a reputable firm.

Qualified Intermediary

Whether you are a seasoned or first-time investor, professional advisors are crucial to navigate the intricacies of fees and regulations. Investors are required to hire a Qualified Intermediary (QI) who will facilitate the 1031 Exchange process.

Professional Guidance

Executing a 1031 exchange involves a complex set of rules and timelines that must be strictly adhered to. Restrictions are imposed on exchanging into properties with the intention of selling them for quick profits. No limit is set on the number of 1031 Exchanges one can execute however, from the date of sale of the original property, the seller has 45 days to identify potential replacement properties and 180 days to close on the purchase of the new property.

Rules can be murky. For example the IRS does not specify a minimum holding period but, holding onto the property for less than two years may trigger a “dealer status” designation and invite closer scrutiny from the IRS.

Given these complexities, it’s crucial that cattle ranchers work with a professional experienced in 1031 exchanges. Such professionals can provide invaluable guidance and help ranchers navigate the process successfully and legally.

Conclusion

A 1031 exchange can be a strategic tool for ranchers, allowing them to boost their profits and reduce tax liability. By reinvesting the gains from sales into “like-kind” properties or assets, ranchers can defer capital gains taxes and reinvest more of their money back into operations. While there are several advantages, it’s essential to remember that 1031 Exchanges only defer capital gains taxes, and they will still need to be paid. Help yourself thoroughly understand potential liabilities by always seeking guidance from qualified tax and financial advisors able to provide professional guidance through the full process.

Habits of Successful Rural Land Investors

Rural land investing can be lucrative and risky. Going it alone can be challenging and highly risky. Successful investors know that it takes a little savvy to be successful in this highly competitive sector.

Land investment offers a myriad of opportunities for investors who are seeking long-term, low maintenance investments with the potential for solid returns.

KEY TAKEAWAYS

  • Land investing requires knowledge, talent, organization, networking, and perseverance.
  • Fully educating yourself is crucial and requires significant research and learning.
  • Understanding the risks and building a professional advisor network are vital.

Key to this success are certain habits and practices shared by successful rural land investors. Let’s delve deeper into these habits and how they contribute to success in this unique sector. Learn more is this 4-minute read.

They Always Consider Risk

We all see the warnings about the risks and potential losses when reviewing stock opportunities. But real estate investors often encounter a narrative of easy money. Smart investors recognize the risks and legal implications involved in real estate deals. They actively adapt their strategies to mitigate these risks and protect their businesses.

“Profit is made when you buy, not when you sell,” advised Eric Johnson becaue he feels that smart investing is all about “de-risking the investment up-front”.

Minimizing potential risks and uncertainties is crucial before committing substantial resources to a real estate project or investment. This strategy involves a comprehensive assessment and effective risk mitigation right from the early stages of the investment process. By adopting such an approach, you can ensure a more secure and successful investment journey.

They Do Their Homework

Effective real estate investors invest in themselves by learning all they can about area, people, market and potential outside risks. Staying informed about the latest trends,like local developments, new or expanding employers, potentail unemployment swings, and the like prepare you to adapt to evolving conditions. By doing so, you gain the ability to anticipate when trends might shift, thus creating potential opportunities for yourself. It all begins with diving into your local real estate market and learning everything you can about it. Real estate investor and rancher Max Franklin agrees: “If you don’t know the people and the area like the back of your hand, you don’t know it well enough to invest in.”

They Rely on a Network

Building a professional network is crucial for real estate investors, whether they are just starting out or experienced. This network can provide valuable support, create opportunities, and help investors grow. It typically consists of a mentor, business partners, clients, or members of a nonprofit organization. Being part of such a network allows investors to challenge and support each other, which is essential in the experiential learning nature of real estate investing. Savvy investors understand the significance of establishing a strong network to thrive in this field.

They Develop Trust

Real estate investors generally have no binding ethical obligations, but it’s worth noting that most successful investors hold themselves to high ethical standards. As real estate involves dealing with people and earning their trust, your reputation plays a vital role in negotiations and sales opportunities. Effective investors understand that fairness prevails over opportunism.

They Specialize

Successful investors frequently focus on a particular part of the real estate market where depth of knowledge is essential. This can take time, but once you master a particular market, you can move on to other areas using the same in-depth approach. Niches might include development land, farm or ranch land leasing opportunities, subdividing for home-building residential parcels, or farm & ranch rehabilitation.

They Plan and Verify

To establish and achieve short- and long-term goals in real estate investing, it is crucial for investors to approach it as business professionals. A solid starting point is developing a well-structured business plan that allows you to visualize the big picture and prioritize important aspects over minor setbacks. This plan not only keeps you organized and on track but also factors in estimated cash flows from rentals, the number of units to own, timing for refurbishment or upgrades, demographic changes, and other variables that could impact your investment over time. By incorporating these elements into your plan, you will navigate the complexities of real estate investing with confidence and efficiency.

They Build Relationships

Trust and the referrals that trust fuels are vital to investors success. People want ot do business with those they, or their friends, trust. Therefore, it is crucial to earn the respect of business partners, associates, clients, renters, and any other individuals with whom you have a business relationship. Effective real estate investors exhibit attention to detail, attentiveness to complaints and concerns, and maintain a positive and professional representation of their business. By doing so, they build a reputable image that attracts potential collaborators.

They Know What’s What

To thrive in land, or any type of real estate investing, you must stay informed about the ever-evolving laws, regulations, terminology, and trends. Falling behind not only hampers business progress but also exposes investors to potential legal consequences. Successful real estate investors understand the significance of keeping up with real estate, tax, and lending laws that directly or indirectly affect their operations. Stay ahead of the game by staying updated on these important aspects!

They Listen to Tax Advice

Taxes represent a substantial portion of a real estate investor’s annual expenses. However, navigating the complex world of tax laws can be time-consuming and divert attention from core business operations. That’s why savvy real estate investors opt to enlist the expertise of a qualified and reputable accountant to handle their financial books. While there may be costs associated with hiring an accountant, the potential savings and benefits they bring to the business far outweigh the expenses. Effective tax planning can make or break an investment. You must prioritize sound tax strategies alongside asset acquisition plans.

They Don’t Go It Alone

In leand investing, going solo can be a tough journey. Successful real estate investors understand the value of seeking guidance from others – be it a mentor, lawyer, or a supportive friend – and attribute part of their success to this collaborative approach. Rather than risking valuable time and money on tackling difficult problems alone, they recognize the benefits of embracing and learning from the expertise of others. Investing wisely in these additional costs becomes a worthwhile investment in one’s own knowledge and growth.

The Bottom Line

Land investing is fun, engaging and challenging endeavor requiring expertise, planning, and focus. And, because the business requires strong relationships with people, investors benefit in the long run by operating with integrity and showing respect to associates and clients. Though you may hear about quick and big profits, the truth is that profitable success long-term requires skill, effort, and strong habits that  encompass research, risk-taking, financial acumen, networking, visionary thinking, environmental consciousness, negotiation skills, and patience. By cultivating these habits, prospective investors can significantly increase their chances of profitable success in rural land investing.