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When Warren Buffett tells Berkshire Hathaway Inc. shareholders that he’d jump at the chance to buy farmland, it could be worth exploring.
“If you said … for a 1% interest in all the farmland in the United States, pay $25 billion, I’ll write you a check this afternoon,” Buffett said at an annual Berkshire Hathaway shareholders meeting.
He did not elaborate on why such a deal would be a no-brainer, but the reasons are many. And, since reaping passive income from America’s croplands has never been more accessible, those reasons are worth digging into.
Dwindling Supply
“They aren’t making it anymore” is not the reason. Farms could be expanded by cutting down forests, converting pastures and other means. But the opposite is happening. The United States is losing farmland it may desperately need at an alarming rate. In the last 10 years, 35 million acres of farmlands have been repurposed, mainly in favor of residential and commercial development.
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Robust Returns
As supply loses ground, the returns on the existing farmland have been outstanding. From 1991 to 2023, the returns on farmlands stood at 10.52%. That’s higher than the S&P 500 (10.07%), real estate (7.84%) and gold (5.67%).
With a shortfall of about 3.2 million homes, most of which will be built on cropland, the amount of farmland will decline, which likely will push its returns even higher.
More People, More Wealth
In 1950, Earth was home to 2.5 billion people. Now, that number exceeds 8 billion. In just over 70 years, the global population has more than tripled. It’s expected to reach nearly 10 billion people by 2050. More people means a higher demand for food, which could increase the demand for farmland.
It’s not just the number of people but what they eat. While the world is getting more populated, it’s also getting wealthier. The middle class will welcome 113 million new people in 2024, which will significantly impact the demand for meat — more wealth means a greater appetite for meat. And animals require fodder. It takes around 6 pounds of grain to get 1 pound of beef.
Alternative Asset Trifecta
Apart from significant, market-beating returns, farmland has also performed well in other areas. It has a low correlation with the stock market, and it’s historically less volatile than the S&P 500, Treasury bonds and gold. Farmland also produces commodities like corn and grain, meaning that it benefits from inflation as the income generated through the land increases.
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