How to Conduct a Comprehensive Test of Agricultural Capabilities

What you need to know before investing.

Investing in agriculture is investing in the continued growth of the human population. As long as the global population continues to rise, the demand for food and focus on human health will continue to climb with it.

Stocks, bonds, and even global commerce may boom and bust, but farmland, including crops and livestock, has traditionally been a stable and reliable investment that can help diversify your portfolio with a return higher than passive income that pay paltry interest rates.

Even during economic downturns, agriculture continues to offer considerable upside with low risk and low volatility. However, as with all investments, it is critical to conduct due diligence about which farmland sector and investment vehicle can produce the best results with low financial risk.

Evaluating Four Distinct Risk Factors

While investing in farmland has positive attributes such as diversification, multiple revenue-generating opportunities, built-in scarcity, and providing a hedge against inflation, it’s also true that no investment comes with a guarantee.

The agricultural market is no exception, which makes performing due diligence with a comprehensive review and analysis of the opportunities available a critical step.

Diligence takes time, but doing so helps with risk and focus. Here are some of the general types of categories to due diligence when reviewing agricultural investments:

Product

Product due diligence is usually split between three distinct groups:

Crop Type: Market demand, growth and harvest cycles, crop yields, insects and disease, production risk, and spoilage during transport and storage all should be under examination.

Sales Execution: Branding, packaging and distribution, marketing channels, sales partners, customer contracts, and supply chain issues can all have an impact on the ability to sell your product and for companies to purchase it.

Transport: Logistics, customs, technological developments, permits and certifications, route issues, and infrastructure all play an important role in successfully delivering your product to market.  

Investment

Depending on where you invest and the type of crop, investment due diligence that can help with risk management includes the following:

Location: Each country or region comes with its own special circumstances, including political issues, economic performance, currency fluctuations, macroeconomic factors, and fiscal monetary policy.

Climate: Weather patterns, average rainfall, soil conditions, runoff, elevation, sunlight, and seasonality define the endemic and adaptable crops that can thrive.

Investment Structure: Jurisdiction, banking, ownership structure, and partnerships need to be carefully evaluated.

Financial: Distributions timeline, capital burn, business model review, projects, and returns/projections should all be taken into account for risk management.

Team

Performing due diligence on the team behind the opportunity consists of two major components: Management and Farming.

Management: This includes the depth and quality in regards to their ability to find opportunities, language, intellectual property, culture and location, technology use, communications, human resources, transparency, and delivering shareholder value.

Farming: Within this subcategory are science and technology in farming, generational farms, crop types, regional knowledge, and history of crop production.

Intangibles

External trends and changes in food preferences, environmental standards, global trade logistics, market risk, market conditions, personal investor knowledge and risk profile, prior asset developer relationships, and experience with similar asset types all fall under this group.

Due Diligence Matrix Example

Different crops provide unique income opportunities. For example, let’s take a comparison snapshot of two very different crops—limes and soybeans. 

Limes - Limes are increasingly enjoyed around the world as an essential ingredient in cooking, cocktails, and essential oils. In 2020, the global export value of limes and lemons increased by 12.2 percent.

• Product - As a permanent crop, planting lime trees requires a multi-year lead time before the first harvest. However, well-maintained trees can bear fruit (and income) for over 50 years. Limes are typically grown outside of the U.S., so distribution, sales partners, purchase contracts, and supply chain management are crucial. Additionally, having a trusted partner for logistics, customs, permits and certifications, and infrastructure all play an equally important role in successfully delivering limes to market.
• Investment - Because limes are endemic to tropical climates, most lime farms are in Latin America. With that, there are investment considerations in regards to political issues, economic instability, currency fluctuations, and environmental factors based on the location of the farm. 
• Team - Assuming you are not looking to farm the limes yourself, you will need to understand your chosen management team from experience to communication and beyond. Additionally, the team’s farming and technological knowledge will have a significant impact on the quality and quantity of harvested limes.
• Intangibles - For limes, this could include a decrease in preference for limes in cuisine or cocktails or even a technological shift in lime production. These appear to be limited given current trends, but they are still topics to consider during due diligence. 

Soybeans - Soybeans are among the most popular U.S.-grown commodity crops. Worldwide production has increased by a factor of 15 over the past 70 years, predominantly for use in vegetable oil, industrial products, and alternative protein for humans and animals. 

• Product - Row crops like soybeans are replanted seasonally using heavy machinery. This has the benefit of faster harvesting in the initial period of the farm, but as a result, the soil also tends to deplete quickly, requiring crop rotation or resting periods between seasons. This likely means more land is needed for the same output.
• Investment - In the U.S., there is generally less concern over political issues, economic instability, and government policy, but climate and financial risks may be higher. Decreased soybean yields in the U.S. as a result of climate change and mounting environmental concerns are starting to have a material impact on farmers. Additionally, the high cost of land, farm equipment, and labor in the U.S. is an additional investment consideration.
• Team - Assuming you choose to outsource the actual soybean farming operations, you will need to get to know your chosen management team. This is true for all outsourced farming operations. However, a focus on experience, successful track record, and frequent communication are all key to risk management.
• Intangibles - In the soybean market, the “trade war” with China is still a fresh memory. For example, China previously purchased 70 percent of North Dakota’s soybeans, and when the country stopped all purchases of agricultural products from the U.S., farmers were hit the hardest. Outside of international trade disputes, there are always shifting consumer preferences and technological innovation to keep in mind.

Despite the due diligence needed in agricultural investment, it can be very rewarding if you conduct research and have the right introspection, knowledge, and guidance to make your decision.

Develop Your Farmland Investment Profile

Once you have considered the factors above, ask yourself the following questions about your objectives and interests in agriculture investing to target opportunities that suit your portfolio.

What are your goals?

Think about which aspects of farm life appeal to you and which ones you’d rather avoid. How involved do you want to be in the short and long term? Is there market risk overall? Do you need to perform shareholder value analysis if you take external investment? Do you know how to complete business transactions? What are your capital requirements, revenue goals, and financial obligations? Is there personal risk to owning and running your own farm?

What type of farm do you want to own?

Food crops and cash crops require very different types of infrastructure, such as row farming or open-land growing. Each type of farm also has unique labor and resource requirements, and you might need to look into crop yield insurance to mitigate production risk on your farm if you run it yourself. 

What is the size of the farm, and where will it be located?

Consider that a small farm within the green belt of the U.S. can cost millions, and that's just for a family farm with all of the multiple risks assumed by you. Meanwhile, a plot of land in emerging markets in Latin America operated by a third-party focused on maximum crop yields with high production that can be sold to global markets will be much less expensive. Going this farm real estate route often means less volatility and could provide greater profit margins along with much lower personal risk.

How accessible is the farm, and what amenities are included?

If you are interested in a farm, verify what structures and infrastructure are in place. Determine what would need to be built to make the farm fully functional and habitable (wells, irrigation, sheds, housing, etc.). Is there a target company who can help you? What personal relationships do you need to develop? What due diligence report must you provide to your own investors? These all must be under examination and answered for risk management and due care.

What is your labor capacity?

Farming is tough with multiple risks, and you will need to find manpower and knowledgeable team members with the current practices that can help you grow, harvest, and deliver your product to global markets and companies who want to do business with you.

Summary

Any investment comes with factors beyond our control, and agricultural investing is no different. However, with the right advice and thorough due diligence, you can do an examination and put in place risk management strategies and properly evaluate the risks and rewards.

One due care has been done, you can then decide how best to generate income and participate in one of the world’s best asset classes. Evaluating the four different forms of due diligence covered above, reviewing the examples given, and developing your specific farmland ownership profile enables clear decision-making on the right agricultural investment for you. 

Assessing opportunities is only one aspect of agricultural investing. The team at Farmfolio can provide insight into appropriate methods for due diligence, offer advice on what type of crops you should own, where the best markets are located, and give you a literal sense for what specific trends are affecting the agricultural industry.

Our comprehensive Agricultural Investment Guide contains all the resources you need to make smart, informed agriculture investment decisions without going through the hassle and expense of being a farmer yourself.

Are you ready to learn more about how to diversify into agricultural assets and take advantage of this recession- and inflation-proof asset class that can generate income from global markets?

Download our free Agricultural Investment Guide today.