How to Invest In Farmland & Agriculture
Meet Peter & Karen.
We created our Farmland Alliance (FA) program as a way to educate the everyday consumer on the value and importance of investing in farmland, the foundation of our food supply. In doing so, we hope to democratize access to farmland as a passive investment that can feed your wallet (and your body) a healthy return, while diversifying your wealth into alternative investments - hard assets that are not tied to stock market cycles.
Investing in farming is a great strategic move. After all, whether the overall economy is in a recession or booming, people still have to eat. Because of this, many investors regard agriculture and farming investments as being recession-proof and inflation-proof. Further, as the world's population increases, farming will play an increasingly important role in sustaining global societies.
Investors have many ways to gain exposure to this sector and we discuss the options below:
Agriculture Stocks
To start with, investors have access to an assortment of publicly-traded companies that operate in the farming sector. These companies range from those that directly grow and produce crops to those working in a variety of industries that support farmers.
Crop Productions
One potential investment opportunity is in firms that plant, grow, and harvest crops. Many of these firms also engage in such supporting activities as distribution, processing, and packaging. Unfortunately, there are a limited number of publicly-traded crop production firms – many are privately owned.
Supporting Industries
Investors can also buy shares in a variety of industries that support farming. Three of the largest industries are companies that sell fertilizer and seeds, farm equipment manufacturers, and crop distributors and processors.
- Fertilizer and Seeds. Many firms are involved in the production and sale of fertilizer and seeds, and investors will want to determine how much of each firm's revenue is actually derived from agriculture, as some also service a number of other sectors.
- Equipment. Farming's an equipment-intensive activity, so investors can gain exposure to the sector by making investments in equipment manufacturers with an agricultural focus.
- Distribution & Processing. Many companies provide the infrastructure that moves crops from the farm to the local grocery store. As with equipment manufacturers, some of these distributors only derive a portion of their revenues from agriculture-related activities.pt
The problem with investing in individual stocks as always:
Researching which Ag stocks to invest in can be a long and difficult process. Leave it to the experts…unless you are a professional research analyst, we will always come up short regarding the true risks.
Most stocks are trading based upon sentiment, versus truly being asset-backed. You can suffer high volatility with no diversification when picking individual Ag-related stocks.
We are human beings; you are probably gonna buy at the top and sell at the bottom; timing the markets is a mugs game
Ag ETFs
Exchange traded funds (ETFs) are a good tool for investors to gain diversified exposure to the agriculture sector. While ETFs do provide low-cost access to a variety of asset classes, industry sectors, and international markets, they do carry some unique risks:
- When it comes to diversification and dividends, the options may be more limited. And understanding the total exposure to the different Ag sub-sectors (production, equipment, distribution etc.) is very hard to ascertain.
- There is a very small selection of Ag-related ETF’s and the generic nature of the indexes often swing in tandem with general market sentiment; ETFs that live by an index can also die by an index—with no nimble manager to shield performance from a downward move.
- Finally, the tax implications associated with ETFs (as with any investment) need to be considered when deciding if they are for you.
Mutual Funds
There are also mutual funds that invest in the farming and agriculture industries. If this sounds appealing, you should first determine whether the fund invests in agriculture-related firms or invests in commodities. Also, keep in mind that many of these funds have exposure to other sectors along with agriculture. So if you're more interested in making a pure farming or agriculture investment, you're likely better off going with other types of asset classes.
When investing in mutual funds, investors need to consider fees and past performance, and compare these to those of ETFs, for example. But at the end of the day, Mutual Funds suffer the same consequences of downward swings based upon general market sentiment..
Farm REITs
You can invest in a farming-focused real estate investment trust (REIT). These REITs typically purchase farmland and then lease it to farmers. Farmland REITs offer many benefits
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- For one thing, they provide much more diversification than buying a single farm, as they allow an investor to have interests in multiple farms across a wide geographic area.
- Farmland REITs also offer greater liquidity than does owning physical farmland, as shares in most of these REITs can be quickly sold on stock exchanges.
- And farmland REITs also decrease the amount of capital needed to invest in farmland, as a minimum investment is just the price of one REIT share.
The problem with REITs is the following:
REITs generally exhibit low growth since they must pay 90% of income back to investors. Thus, only 10% of income can be reinvested back into the business.
REIT investors cede control of all the operational decisions that an individual property owner would make.
Some REITs will incur high management and transaction fees, leading to lower payouts for shareholders.
The Bottom Line
WHERE IS MY CONTROL?
Investors looking to invest in the farming sector have a few alternatives than actually owning farmland directly. But at the end of the day, you don’t control what your money is invested in and you live or die by the whims of other people.
We like to tell investors, who is going to take more care managing your money, you or a 3rd party manager taking fees whether your wealth goes up or down?
Which brings us back to our preferred method for owning Farmland. They are called Land Ownership-Titles (LOTs)! We create new farms or purchase existing productive Farmland assets already earning regular income and divide it into individual hectares or cuadras. These farms already have a farm management team in place so you can own the land and earn the profits without having to do the farming. Depending on the crop, you can purchase this annuity income stream that lasts for decades!