According to the US Department of Agriculture, farms owned by institutional investors are now responsible for more than twelve percent of total food output in America!

That might not sound like a whole lot, but the value of farmland investments has more than doubled since 2020 alone.

Cascade Investments is an investment firm that reportedly employs over 100 analysts and operates exculisively to manage the assets of Bill Gates and his ex-wife Melinda.

It owns assets like a 71% stake in the Four Seasons Hotel chain and 14% of the Canadian National Railway, but it also owns a quarter of a million acres of farmland.

The farmland is owned though a series of smaller holding companies, but when asked why they had bought up so much farmland, the firm simply suggested that it was a good investment, nothing more.

Many outlets have claimed that this makes Bill Gates the largest landowner in America, but that's simply not true, not by a longshot.

Major investment companies and even other billionaires have invested so much into farmland over the last 2 decades that it makes Gates' 250,000 acres look positively pathetic.

So why have cornfields become the hottest asset amongst the big boys on wall street?

Investors are buying up farmland across America. And critics say it's pushing out the small family farmer, but advocates say it's propping up the market.

John Malone, the largest private landowner in America, owns 2.2 million acres all by himself. Why do you think Bill Gates is buying up all this land?

He reportedly purchased more than 200,000 acres in 18 states.

Farming has typically been done by families who own their own farm and work on the land themselves with or without the help of additional labor during harvest.

Despite the rapid growth of financial investors into farmland, most farming is still done this way. But exactly how much is really hard to tell.

According to the Economic Research Service of the US Department of Agriculture, just over 60% of farmland is owner operated and the remainder is rented to the farmers that work the land. This doesn't tell the full story though.

Because while owner operated farms may evoke imagery of small-time family farmers, it can include institutional operators that also happen to own the land.

Similarly, some families rent out their land to external operators, either because they can't productively use the land themselves, they don't have enough land to achieve economies of scale,

or because they would rather the more passive rental income stream than stressing over a harvest.

These agreements can vary from state to state and individual to individual. Some agreements could be a little more than a handshake between two local land owners.

And plenty involveed corporate lawyers representing the interest of an institutional agricultural real estate investor and another team of lawyers representing the interest of an institutional food production company.

The final thing that makes it hard to assess just how much farmland has become a financial asset is that most farmers will incorporate even small farms as a business because that's exactly what they are.

So even small hobby farms will have effectively the same business structure as a massive commercial farm, which is part of a portfolio of farms owned by a family office from a major city.

It's these very conditions though that have made farming so attractive to big investors for four reasons. The first is that it's an amazing opportunity to consolidate and scale.

Farming is a business that gains tremendous efficiencies from scale.

A small 100-acre family farm is going to have a lot of the same fixed costs as a 10,000-acre commercial farm, squeezing their margins from commodity products.

Large commercial farms also have more negotiating power over expenses like seed, fertilizer, pesticides, equipment rental, fuel, labor and even interest on their loans.

Because large commercial borrowers will normally have access to more favorable lending facilities than small family farms going to their local community bank.

According to the most recent USDA Farm Production Expenditure Summary, these were the topline items for most farms, which run on razor-thin operating margins.

Just 10% of small family farms have an operating profit margin above 25%, a share which has had over the last decade.

If the family is operating the farm themselves, that can mean that even if there is profit left over at the end of the year, it would equate to less than minimum wage for the people working the land.

The Wall Street solution has been to buy up lots of small relatively inefficient family farms and turn them into one big farm with wider operating margins.

The number of individual farms in America has been on a steady decline since the Great Depression.

But the total number of acres dedicated to farming has remained stable, which means farms have simply been getting bigger.

Now just because a business's changing doesn't automatically make it a bad thing, these larger farms on top of being more efficient businesses also have more capital to invest into technology.

According to a McKinsey Industry Survey, less than 5% of farmers in North America are adequately investing into new technologies and often that's because they can't.

Another report by the firm found that fully automated systems could quadruple returns on the farmland.

The only problem is if you wanted to buy the equipment they were studying and use it on your own family farm, it would cost you at least $350,000 if you were prudent and purchase it used.

Small family farmers cannot afford that without further putting themselves into debt.

But the idea of quadrupling ROIs is enough to pitch inent in any investment firm who would happily allocate the money.

This business strategy is right out of the private equity playbook of rolling up lots of smaller businesses into one larger business that has shared overhead and more market power.

This could mean more investment into technology to lower food prices for everybody. Or it could be used to widen margins for investors.

But even in a perfect world, the benefits of what they can do with some business optimization has nothing over the advantage that farms have as an investment when it comes to debt and tax minimization.