Article / October 1, 2020

Barriers to Entry in Agriculture Investment

For investors, agriculture can fulfill a wide range of purposes. Agricultural assets can generate income, provide long-term appreciation, hedge against inflation, and help diversify an alternatives portfolio, among other things. But despite the multitude of benefits that the space offers investors, agriculture investment can be a difficult asset class to access. 

Historically, agriculture investment has been mainly limited to institutional players who can deploy the capital needed to implement economies of scale in the ag space. Institutions such as mutual funds, private equity funds, family offices, and hedge funds have shown increased interest in agriculture in recent years, often citing its non-correlated nature. 

But private investors have long faced significant barriers to entry in the ag space. To change this, the industry must create vehicles for this type of investment, leveraging economies of scale while generating returns on an individual basis. There is tremendous potential for those who can create this type of access, and for those investors who choose to participate in it. 

Large Capital Requirements

Perhaps the most difficult hurdle for investors entering the ag space is the sheer ticket size of most agricultural investments. Buying even a small farm can easily run into the hundreds of thousands of dollars, and even then, small farms can rarely make use of the economies of scale needed to generate any real return on investment. This has limited agriculture investments to large institutions who can deploy the capital needed to operate at scale.

The ag space attracts a variety of institutional players. 

But smaller, private investors often lack the means to access the space. Equity, REITs, ETFs, futures, and other vehicles exist that can provide exposure to the agriculture space at a lower cost. But none of these vehicles features the dual benefit of appreciation plus cash yields that has led many to refer to farmland as ‘gold with a coupon’

Few agriculture investments are accessible at a lower ticket price. There are now a number of crowdfunding options for farm ownership, but these are often based in developed countries, where appreciation potential is low, and are generally focused on low-margin row crops like soy and corn. Reducing the ticket price of direct farmland investments, as well as a shift in focus towards high-value permanent crops, would be a huge step forward for the ag investment space. 

Finding an Operator

Suppose you do have the capital to buy a farm. Great. But where to find one? What do you know about soil quality, commercialization, irrigation, logistics, genetic resources? If you’re an expert in all of these things, you may as well run the farm yourself. 

Farm operators must interface with a vast and complex supply chain. 

The entire presupposition of agriculture investing is that people who don’t have this type of knowledge can profitably access the space. But to do this, you need to connect with people who can answer these questions for you. 

Farming as a Service is a model that has seen success in the developing world, allowing investors to acquire farmland without the need to assume the risk of operating it. The essential qualities of experience and trustworthiness are at play here, and finding an operator with the local and technical knowledge to succeed is indispensable. 

This is especially true in those regions where potential for appreciation and cash flow is the highest – emerging markets. With lower operational costs, cheaper land, and stronger possibilities for value-added production and supply-chain integration, emerging markets are becoming a preferred destination for investors in agriculture. 

Local Presence

It’s simple – you can’t benefit from an agriculture investment if you don’t have boots on the ground. This isn’t to say that stakeholders need to be physically present in order to maintain the integrity of their investments – but someone has to be, and investors need to know who that someone is. Agriculture is a complicated business, and carving out a place for yourself in markets and supply chains requires a practical knowledge of the environment in which the business operates.

This is doubly true in the frontier areas where agriculture shows the most potential. Many agribusiness ventures have failed because the people in charge weren’t willing to take the extra step of being physically present in the locales they wished to operate in. 

Due diligence is key in ag investment.

If you’re going to invest in agriculture, especially in emerging markets, you have to be tough. Accountability starts at the top, and without an adequate alignment of interest, no business can succeed. Investors in agriculture, especially in the farmland or private equity space, need to know that they can trust the organization that is going to be deploying their capital. 

Agriculture investment cannot be made profitable from afar. It has to be done locally. The issues faced by the day-to-day operations team must be known to the higher-ups. Without a local presence, communication throughout the chain of command becomes muddled and ineffective. The lack of a local presence is one major hurdle that potential agribusiness investors face, and can only be overcome by a real commitment on the part of the operator. 

Agribusiness is not the most easily accessible of investment categories. There are many avenues for exposure in agriculture, but to access the opportunities with the greatest upside potential, investors must overcome significant hurdles. Getting past these barriers to entry can be daunting, but those who persevere are greatly rewarded. 

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