Billionaires are quietly amassing farmland; What could this mean for the future of ag?

John Dealbreuin
Currently, investors are attracted to farmland due to its low correlation with the stock market's volatility.

No, Bill Gates does not own 80% of all U.S. farmland. The billionaire philanthropist and Microsoft founder recently cleared the air on his 11th Ask Me Anything (AMA) session on Reddit.

In response to a question, "Why are you buying up so much farmland, do you think this is a problem with billionaire wealth and how much you can disproportionately acquire?" Bill Gates responded, "My investment team bought the farmland. (But,) It is less than .1% of all U.S. farmland because the ownership is so diverse. We invest in the farms to raise productivity. Some are near cities and might end up having other uses."

The purchase of over two thousand acres of prime North Dakota farmland by a group connected to Bill Gates has evoked strong feelings regarding laws from the Great Depression era created to safeguard family farms and has raised questions about the billionaire's motives.

Farmland as an investment

Farmland investing has a long history of producing stable returns. The returns are due to increasing farmland values and the profit from the cash crops.

The Federal Reserve Bank of Kansas City published its report titled "Growth in Farmland Values Slows Amid Higher Interest Rates." The report highlights that farm real estate values increased considerably in 2022 but showed signs of softening during the final months of 2022 as interest rates rose sharply.

Elevated commodity prices continued to support profit opportunities for many producers across the farm sector, but concerns about operating expenses, higher interest rates, and intense drought persisted.

According to the USDA, inflation-adjusted net farm income is forecast to be $167.3 billion in 2022. It represents an 8.3-percent increase from 2021 and the highest level since 1973.

The global population has been increasing, and the demand for food has been steadily growing. A meta-analysis of projected global food demand by Nature indicates the total global food demand is expected to increase by 35% to 56% between 2010 and 2050. It will have a significant impact on agricultural markets. Farmers worldwide need to boost crop production somehow by expanding the amount of farmland devoted to agriculture or by increasing productivity on existing agricultural properties.

Currently, investors are attracted to farmland due to its low correlation with the stock market's volatility. This makes it an exceptional tool for diversifying portfolios.

Farmers have pricing power for their crops. Food is not a discretionary item on any budget. Farmland increases in value when agricultural products increase since the underlying land becomes more valuable. It makes farmland well-suited to retain value over time, even during recessions or inflationary environments.

The lure of alternative assets

Billionaires and high-net-worth endowment funds have always diversified their investments from stocks and bonds into alternative assets.

Although Bill Gates is the largest private farmland owner in the U.S., other billionaires are also landowners. The billionaire media mogul Ted Turner owns 2 million acres, while Amazon founder Jeff Bezos has amassed 420,000 acres.

In a 2014 letter to investors, Warren Buffet described farmland as an investment with "no downside and potentially substantial upside."

Large institutional investors have favored farmland for a long time. The top U.S. university endowment funds have invested billions in cropland and other real estate investments.

The tax exemptions granted to pension funds and endowments in the United States undoubtedly bolster the financialization of farmland.

Federal tax regulations stipulate that most private foundations must spend a minimum of 5 percent of their net assets annually to maintain their tax-exempt status. Universities are excluded from this mandate, and their investments' income does not face the 15 percent federal capital gains tax.

Examining impact of financialization on ag

The way farmland is utilized as a part of the multibillion-dollar portfolios for wealthy institutions and billionaires should not be overlooked. Not only does it signify an ever-growing concentration of wealth at the top, but this especially holds tremendous relevance due to controlling a vital food source.

As early as 1980, concerns over the implications for American agriculture due to the investment of pension funds in farmland led to U.S. Senate hearings. Senator Gaylord Nelson worried about the escalating price of farmland, making it almost impossible to start farming.

He said, "We will then replace the system of dispersed ownership of farmland by those who till the soil and plan to hand it on to their children with ownership by investors, speculators, and institutions interested in maximizing their economic gain."

The U.S. Department of Agriculture granted funds to Madeleine Fairbairn for studying "farmland financialization."

Her research concluded that land allows institutional investors to diversify their risk while earning a respectable profit. However, to the small farmers, it's their very livelihood. The land is essential to farmers, indigenous peoples, and rural communities - it provides them with food security, pride, and cultural identity.

Although Bill Gates does not own 80% of the American farmland, the high ownership level raises concern. With time, as more and more investors regard farmland as a regular financial asset class, the price of farmland might fluctuate dramatically. We cannot allow these precious resources to become tools in an investment arsenal; used by wealthy institutions without a thought for those whose lives depend upon it.

This post was produced by Financial Freedom Countdown and syndicated by Wealth of Geeks.