Should You Buy Agriculture Stocks or Invest in Farmland Directly?

The pros and cons of active vs. passive agriculture investing.

Agriculture is vital to the global economy, providing food and other essential products that feed a growing population through financial ups and downs. This constant demand can make owning agricultural investments an excellent hedge against inflation and a lever for portfolio diversification. 

Farmland is also an attractive asset class poised for long-term growth due to its low volatility and dual income streams driven by the sale of crops and long-term land appreciation. But once you've decided to put a portion of your assets into agriculture, should you buy farmland directly or invest in agriculture stocks and securities?

How to Invest in the Farming Sector

Investing in agriculture can be a lucrative way to diversify your portfolio, but it's essential to do your research before diving in. The agriculture industry is complex, with various factors affecting crop yields, prices, and ultimately your returns. 

Weather patterns, pests and diseases, and global demand play a role in agriculture production. As an investor, you'll need to understand these factors to make informed decisions about where to invest. However, you don't need to be an expert in agriculture to make money from investing in the sector. 

Common Avenues for Agriculture Investments

There are many ways to get involved in agriculture investing without buying a farm, from purchasing shares of companies with agricultural exposure to investing in agricultural commodities like crop futures and passive farmland ownership. Other popular farmland Investment vehicles include agricultural securities, ETFs, and direct farmland ownership.

Each option has its advantages while exposing you to the growth and harvesting of this vital element for human life. With some research, you can find an agriculture investment that fits your risk tolerance and financial goals.

Buying stocks and other securities allows you to invest in various options with little capital and limited farming knowledge. For example, you can invest in agriculture stocks and ETFs, farmland REITs, and private equity funds focused on food production.

However, the average retail investor has no control over the output of the underlying assets and is subject to commodity volatility and market swings. Direct farmland ownership gives you more control but typically requires more capital and knowledge. Passive farmland ownership provides a good balance between the two extremes.

If you're considering investing in farmland, it's important to weigh the pros and cons of how each option fits into your financial situation.

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Advantages of Using the Stock Market to Invest in the Agriculture Sector

If you're looking for a more hands-off approach, buying agriculture securities and stocks may be the way to go. With minimal experience and a small amount of cash, you can access various investment options. 

Here's why a beginner might consider investing in farmland via securities.

No Experience Necessary

A lack of personal experience in agriculture doesn't mean you can't invest. Many publicly traded companies focus on crop production, and they can be a great way to benefit from the growing world population. 

Of course, a bit of research is essential before investing, especially in unfamiliar sectors. But if you take the time to learn about the companies you're interested in, agricultural stocks can offer an excellent opportunity for growth.

A Multitude of Agriculture Options

When investing in agriculture, many publicly traded companies focus on all aspects of the agricultural value chain. 

From businesses building machines that drive farming infrastructure to those supplying seeds, fertilizer, and other agricultural necessities, investor options are vast. Some mutual funds and real estate investment trusts also explicitly focus on farmland. 

These are just a few options for investors interested in the agricultural industry. 

Accessible with Smaller Amounts of Capital

For many people, buying farmland is cost-prohibitive. A single acre of farmland in the U.S. can cost nearly $4,000, out of reach for many investors. 

Fortunately, there are ways to gain exposure to the agriculture industry without breaking the bank. Listed companies and exchange-traded funds (ETFs) offer a way to get exposure to the agricultural sector with small amounts of capital. 

Agriculture ETFs offer the bonus of diversification by buying a basket of stocks that track the industry. 

No Need to Get Your Hands Dirty

Population growth means the demand for food will also increase. Although this may make farmland a wise investment, farmers work hard. 

This makes many investors hesitate to invest in farmland because they don't want to get their hands dirty. Fortunately, you can invest in farmland without actually having to work on the farm. 

For example, a mutual fund or real estate investment trust can give you farming exposure. Or, you can directly purchase shares of a publicly traded agricultural company.

Stocks Allow for Liquidity and Easy Diversification

When it comes to managing risks, agricultural stocks offer easy diversification. They let you spread your money across different crops, climates, and geographic locations while providing a buffer against various commodity risks. 

Plus, if you need cash for whatever reason, stocks and securities are easier to liquidate than real estate.

For example, let's say that the livestock industry was struggling due to an outbreak of disease. This would potentially lead to higher prices for beef and pork, but the prices of grains and other crops would likely be unaffected. By investing in agricultural stocks, you could mitigate your risks and still potentially profit from rising commodity prices. 

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What Are Agricultural Stock Investors Missing?

Although it's possible to get a lot of agriculture sector advantages from the stock market, mutual funds, and other securities, investing only in securities can have disadvantages. There's often a lower level of involvement, control, and return available with securities, factors that usually can't compete with the advantages of direct farmland ownership. 

Further, direct ownership opportunities even exist for investors without a farming background who want to profit from the industry's growth.

Stock Investors Are Subject to Volatility

One of the biggest downsides to going the publicly traded route is that most agricultural securities investments are subject to the same volatility and sentiment-driven swings as the stock market. For example, when investors become optimistic about the industry's prospects, they may artificially bid up prices for agricultural stocks. 

However, when investor sentiment turns negative, share prices can drop just as quickly. This volatility can be a significant downside for the financial returns of securities investors unprepared for stock market ups and downs.

On the other hand, a direct farmland investment tends to outperform stocks and is considered one of the safest asset classes to invest in. Even during the most volatile years in recent history, like the 2008 financial crisis, farmland showed its resilience. From 2004 to 2012, the agriculture sector was relatively profitable.

Less Control Over Your Investment

When you buy company shares, you become a part-owner of that business. As a shareholder, you have the right to vote on important company decisions and receive a portion of the profits (dividends) that the company generates. However, a few shares in a large public company don't give you much say in how the company is run. 

Beyond having little say in company decisions, there are other factors diluting company profits before you receive a return. Some of the biggest companies have tens of thousands of employees, managers, and executives who need to be paid before investors receive a dividend. 

Additionally, aside from company activities that generate uncertain returns for investors, share prices and company profitability rely on commodity prices and consumer preferences. Even solid individual company performance can rarely compensate for a depressed sector. 

Market investors are also at the mercy of larger natural forces. For example, changes in global demand can lead to higher or lower prices for agricultural commodities. Although these fluctuations can also impact farms’ profitability, the land and equipment value tends to remain stable, and each season presents the farm with a new opportunity. 

Ultimately, as a retail securities investor, you end up with much less control over your investment than you’d enjoy with direct farmland ownership. 

Lower Yields

While ETFs and other securities designed to track physical commodities are attractive because of their liquidity and accessibility, they tend to have lower dividend yields than physical real estate. For example, farmland offers both capital appreciation and generates revenue from its crops. 

Just like companies with agriculture exposure have expenses and overheads that eat into investors’ returns, ETFs, mutual funds, and REITs also come with costs. The expense ratio of these securities can eliminate a significant chunk of the overall return.  

Farmland Is a Better Hedge Against Inflation

Inflation is a major topic that is likely to impact investors and consumers for the foreseeable future. During inflationary times, buying power decreases, limiting what consumers and businesses can purchase for the same money.

Institutions and individuals often seek to hedge against inflation by investing in physical assets like precious metals or real estate to protect their purchasing power. Farmland is one of those assets offering a great hedge against inflation, often beating other investments like equities and even gold. 

Market Investments Don’t Allow for Precision

When you purchase an ETF or stock in a public company, you invest in the entire business or a global asset class. The disadvantage is that you can’t invest in a niche product line but the business as a whole.

It also limits your exposure to emerging markets or less common asset classes. Often, these lesser-known investments present the most significant opportunity to outperform the rest of the market. For example, out of the world’s top lime exporters, Colombia delivered the greatest growth of 57 percent in 2021. Given that lime production has historically been dominated by Spain and Mexico, broad market investments may overlook these opportunities.

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What's the Right Option for Your Agriculture Investments?

Investment decisions depend on your financial situation, risk tolerance, and level of expertise. If you're looking for a hands-off investment that requires little capital and expertise, then buying agricultural stocks may be the way to go. 

On the other hand, direct investment and ownership may be the better option if you're seeking more control over your portfolio and are willing to invest the time and effort required to manage a farm. This control, coupled with farmland’s recession-proof low volatility, dual income streams, and ability to hedge against inflation, makes direct ownership an attractive proposition. 

A Third Option for Investing in Agriculture

Making agriculture stock picks or buying and farming the land yourself are ways to diversify your portfolio and gain exposure to agricultural industries. However, there's an alternative that combines the best of both worlds.

Passive Farmland Ownership

Passive farmland ownership lets you take advantage of farmland’s benefits as a recession-proof asset with relatively small investments (especially compared with buying an entire ag operation) without getting your hands dirty.

Farmfolio's LOTs (Land Ownership Titles) provide a novel way to invest in agriculture without the effort of becoming a farmer. LOTs are subdivided pieces of farmland that are part of a larger farm in emerging markets available for direct purchase by accredited and non-accredited individuals. 

The big advantage of investing through Farmfolio is that it's part of a pre-developed, vertically integrated, turnkey system managed by an independent Farm Owners Association (FOA). The FOA hires a third-party expert management team to handle everything involving farmland production, including planting, land maintenance, harvesting, and sales. 

This type of agricultural investment is growing in popularity because it's seen as a recession-proof way to invest in premium agricultural land. As the growing population drives higher demands on our food supply chain, there's an increasing demand for farmland partners who can invest in agricultural land and the expertise to manage it.

By doing your homework and understanding the risks, you can decide whether a potential investment is suitable for your financial situation.

Complete the form below to connect with our team and learn more about the significant opportunities that come with passive farmland ownership. 

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