There are a lot of reasons an investor might be interested in putting their money into agriculture. For one, it may seem like a safe bet since during a recession, people may cut back on haircuts or hold off on getting their car repaired but nobody stops purchasing food. You may also simply be interested in the agriculture industry or perhaps you’ve always romanticized the idea of farming. If you want to raise money by helping farmers raise crops, then keep reading. Before you invest in anything, it’s always prudent to first talk to a financial advisor who can look at your portfolio and help you manage any risk.
How to Invest in Agriculture
Any investment involves some level of jeopardy, but the agriculture industry certainly has some risks built into the system. People make profits off farming, to be sure, but everything from climate change to global markets can affect the price of crops and cattle and create a bad financial year for farmers and investors alike. But if you want ideas on how to invest in agriculture and minimize your risk while doing it, consider looking into the following types of investments.
- Farm REITs: REITs stand for real estate investment trusts and farm REITS are simply real estate investment trusts that are part of agricultural corporations.
- Farmland: You can invest directly in farmland. Some of the bigger companies that allow you to invest directly into farms — they work like REITs but are not really considered REITs — are AcreTrader, FarmTogether (not to be confused if looking online for it, with the video game, Farm Together) and Farmfolio, which is based out of Colombia. These agricultural companies generally buy land and then lease it to farmers or investors.
- Agriculture Stocks: Some publicly-traded companies specialize in investing in the farming industry. Some of the leading agricultural stocks currently include CF Industries Holdings Inc., Cal-Maine Foods Inc. and American Vanguard Corp.
- Exchange-Traded Funds (EFTs): EFTs are a basket of securities purchased or sold through a brokerage firm on a stock exchange and three are EFTs that specialize in the agriculture industry. These are known as agricultural commodity ETFs, sometimes called Ag ETFs, which are funds that invest in companies that produce foods such as grains, dairy products and livestock.
- Mutual Funds:Mutual funds are companies that collect money from investors and then put that cash into securities such as stocks, bonds and short-term debt. You could put your money into mutual funds that specialize in investing in the agriculture industry.
- Soft Commodities Markets: These are futures contracts (a legal agreement to buy or sell a commodity asset or security at a predetermined price at a specified time in the future). Soft commodities are considered commodities such as coffee, cattle and sugar (commodities that can be grown are a good way to think about it). Hard commodities tend to be mined, such as gold or copper. Earlier, we mentioned the risks built into the agricultural industries. Investors who buy and sell on exchanges in the soft commodities market are attracted to the risk because while you can lose big, you can also win big.
What to Consider Before Investing in Agriculture
Investing in agriculture can be risky but it can also be rewarding for your portfolio. If you’re looking to limit the amount of risk that you take while enjoying agriculture-related investments in your portfolio, consider keeping these three rules in mind:
1. Spread Your Risk
Unless you’re investing in a family member who you want to help and believe in, you probably wouldn’t want to invest in one farm and farmer. That’s why Farm REITs exist, for instance. Investing in agriculture is far less risky when you invest in the agriculture industry as a whole as opposed to one individual, who could face financial ruin, such as bankruptcy.
2. Agriculture Can Be a Hedge
Keep in mind that investing in agriculture is a useful hedge against inflation. Inflation can be damaging to investments, because of the dollar losing value, but food prices tend to lead the pack when it comes to expenses rising. Real estate is often considered a good hedge against inflation and so if your investment includes a lot of successful farms, with a lot of land and success selling its crops, you may, in a sense, have two hedges against inflation.
3. Demand Grows as the Population Grows
As the population grows, so does the demand for agriculture. As noted earlier, everybody needs to eat. In other words, while there is a lot of risk to being a farmer and investing in one farmer, this is a growing industry that isn’t likely to slow down anytime soon. The population continues to increase in size year over year so there is no shortage of opportunity.
The Bottom Line
If you’re looking to invest in something that can bring you wealth and in an arguably good cause — any industry that feeds hungry people can’t be all bad — agriculture is certainly something that any investor should consider. As with any investment, agriculture has its risks. Droughts can kill crops. Natural disasters, like hurricanes, can as well. Tastes change and what may be a popular crop one year may be less in favor of the next. But eating well never goes out of style and so if you invest shrewdly, it’s hard to see how you’ll end up with a bad case of indigestion.
Tips for Investing
- Before investing in anything you may want to understand how it fits into your overall financial plan. If you don’t have a plan, consider working with a financial advisor who can help help you assemble one that reflects your goals. Finding the right financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- In order to best understand how a certain investment mix will change your portfolio, consider using SmartAsset’s free asset allocation calculator.
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