Investing in agriculture: The missing piece in your investment portfolio?

When it comes to investment opportunities, we tend to keep our eyes fixed on Wall Street. 

‍

Traditional stocks and bonds often take center stage in our portfolios.

‍

And for good reason.

‍

These investments are familiar, accessible and have delivered strong returns for many investors over the years. 

‍

However, beyond these conventional investment types, there’s a vast landscape of often overlooked options… 

‍

These alternative investment types — informally referred to as “alts” — offer equally compelling, if not competitive, advantages compared to conventional investments. 

‍

Among them, one such promising sector is necessary for survival.

‍

It’s sustainable.

‍

And consistently in global demand.

‍

Agriculture.

‍

Agriculture investment opportunities may not be the most glamorous or flashy. And they might not seem cutting-edge compared to the latest tech IPO.

‍

But don’t underestimate the weight of their potential.

‍

Especially when they have remained off of so many investors’ radars.

‍

So, what does investing in agriculture entail, and should you consider it?

‍

What are agriculture investments?

Investing in agriculture involves financially backing a broad range of assets and operations connected to the production, processing or distribution of food or crops. These can range from buying shares in an AgTech startup to purchasing a slice of productive farmland to putting your money behind a farm machinery manufacturing company. (More on different ways to invest in a bit...)

Compared to more conventional investments like stocks, bonds and cash, the alternative asset class — especially in agriculture — is often less familiar territory to investors. But with global pressures mounting, the sector's potential becomes increasingly hard to ignore.

‍

Consider that as the world’s population continues to swell, the demand for food — and therefore, the agriculture sector — also increases. It’s projected that by 2050, the industry will need to produce 70% more food to sustain an estimated 9.6 billion people. 

‍

This sense of urgency is furthered by a 2022 report from the American Farmland Trust, “Farms Under Threat 2040.” Data in the report reveals that the U.S. is on track to lose more than 18 million acres of farmland by 2040.

‍

These statistics present a clear picture: A burgeoning population paired with an increasing demand for food primes the agricultural sector for expansion. 

‍

For investors willing to explore this underutilized market, the question becomes, then, how might an agricultural asset be the missing piece in diversifying and strengthening an investment portfolio?

What are the benefits of investing in agriculture?

Investing in agriculture not only offers many of the benefits of traditional investments but also provides advantages unique to the sector.

‍

Here are nine upsides to agricultural ventures.

‍

• Diversification: A diverse portfolio that spans various asset classes, geographies and sectors is crucial to any long-term investment strategy. Agriculture brings a unique asset class that can diversify your portfolio while reducing the risk associated with declines in other sectors.
• Long-term financial stability: Agriculture, particularly farming, has supported global economies since the dawn of civilization, generating resilience and stability that have historically delivered long-term rates of return. Four decades’ worth of data from Iowa State University revealed that nominal farmland values appreciated at an average annual rate of 6.7% from 1970 to 2021. Layer in an average yearly inflation rate of 4% and this translates to annual growth values of 2.7%. The average cash rental rate of return during that same timeframe was 6.1%, making the inflation-adjusted average annual total return on farmland ownership 8.8%.
• Consistent demand: As the world's population grows, so does the demand for food and agricultural products. This translates into a market that’s not only steady but expanding.
• Inflation hedge: Agriculture investments, particularly in commodities, can help provide a hedge against inflation. In other words, as food prices increase, the value of these investments tends to follow suit. 
• Passive income potential: Certain agricultural investments, such as farmland and farm REITs, can generate ongoing passive income through crop sales or leasing agreements.
• Inherent real estate value: Especially in the case of farmland investments, you're not only investing in a productive asset but also a piece of property that appreciates over time. 
• Efficiency improvements: Farming innovations continue to increase the efficiency of agricultural operations, which are linked to the enhanced value of your investment.
• Tangible asset: Agricultural assets, like farmland, are tangible. You're putting money into actual, physical property, which some investors find reassuring compared to intangible assets like stocks or bonds.
• Environmentally and socially responsible: Investing in agriculture means connecting to an industry critical to global food security and biodiversity. This approach may be appealing to those interested in socially responsible investing and can add a layer of value beyond purely financial gains.

‍

Different ways to invest in agriculture

As an investment sector, agriculture offers a wide range of options based on investment preferences and risk appetites. 

‍

Here are six of the most common avenues for investing in agriculture. 

‍

Farm real estate investment trusts (REITs) 

Farm REITs are companies that own, operate or finance income-producing farmland. Investing in farmland REITs allows you to buy shares without having to manage the land yourself. As a shareholder, you benefit from the income the properties generate, as well as potential appreciation in property value.

‍

Investing in farmland 

Directly investing in farmland involves purchasing land used for farming or agricultural activities. This venture typically requires significant upfront capital (typically $500k+); the return on investment (ROI) comes from either the sale of crops produced on the land or from leasing the land to farmers. 

‍

While farmland investing might seem like a hands-on approach, many investors choose to partner with a farmland investment company, or delegate operational responsibilities to land managers or experienced farmers through lease agreements. These types of arrangements allow landowners to generate passive income without needing to directly oversee the farm’s day-to-day operations.

‍

Data from the 2022 Iowa Farmland and Ownership Tenure Survey affirms the viability of this strategy, stating that 55% of Iowa farmland is owned by individuals who don't currently farm. Among these landowners, 53% lack farming experience, indicating farmland can be a viable investment, even for those without a background in farming.

‍

Agricultural stocks 

Agriculture stocks are shares purchased in agricultural companies, such as equipment suppliers, seed companies, food producers and agricultural chemical manufacturers. Just like with any stock investment, you're investing in the performance and growth of these businesses. 

‍

Agricultural exchange-traded funds (ETFs) 

Agricultural ETFs are funds that track an agricultural index, which might include a mix of agriculture stocks, commodity futures and other related ventures. This strategy allows for diversified exposure to the agriculture industry with the ease of trading a single security.

‍

Commodities 

Agricultural commodities are grains, livestock and crops used to produce other goods. This option often entails purchasing futures contracts, an agreement where investors buy or sell a designated portion of the commodity at a set future price. It’s worth noting that commodity investments can be highly volatile and, as such, may be better suited for experienced investors.

‍

AgTech investments 

Agricultural technology investments, or AgTech investments, involve putting your money into innovations designed to improve efficiency and productivity in the ag industry. This can range from companies building farm automation solutions to biotech firms engineering crop optimization. This investment type is often more speculative but carries the potential for high returns, especially as the world seeks more sustainable, efficient ways to meet increasing food demands.

‍

What to consider before investing in agriculture

Just like with any financial decision, investing in agriculture assets requires careful consideration. Here are some key factors to keep in mind.

‍

Determine the type of investment to make

Are you drawn to directly financing a physical asset, like farmland, or are you more comfortable with an indirect investment, such as a farm REIT? Understanding the nature of your investment is essential as it directly impacts your role, potential returns and risk level. Your decision should align with your personal financial goals, ideal level of involvement and risk tolerance. 

‍

Pro tip: Review market reports, historical data and industry news, and consult with agricultural investment specialists to gain a holistic understanding of agricultural portfolio options. 

‍

Evaluate the sustainability of the investment 

Sustainability applies in two senses here: environmental impact and sustainability of the business model. Investments that follow eco-friendly practices and have scalable, efficient operating models are likely to be more resilient and profitable in the long run.

‍

Pro tip: Conduct due diligence on the potential venture’s sustainability practices, such as its use of crop rotation and water conservation methods. Assess the scalability of the business model by vetting its infrastructure, technologies and growth plans. And gauge market demand by investigating market trends, consumer preferences and potential competitors. Such a thorough evaluation helps ensure your investment not only contributes positively to the environment but is positioned for long-term growth.

‍

Conduct a risk vs. reward assessment 

Understanding the potential risks and rewards of any venture is paramount to making an informed decision. The agriculture industry is inherently linked to geographical and climate conditions, making it susceptible to certain risks that could impact your returns.

‍

Pro tip: Stay current with agriculture news and do deep dives on geographic and market risks associated with your prospective investment. For example, certain areas might be more prone to drought, pests or other environmental challenges.

‍

Consider your exit strategy 

Just like any other investment, consider how easy it will be to sell when the time comes. Knowing when and how you’ll seek to liquidate gives you better control over your financial plans and can offer a safety net in times of financial need.

‍

Pro tip: Gain a clear understanding of market trends, ideal buyers and the optimal time for you to sell. It’s best to have a clear exit strategy in place before you commit.

‍‍

Where to go from here?

‍

Navigating the vast terrain of agricultural investments can seem daunting, but every journey starts with a single step. 

‍

If you’re considering expanding your portfolio to include agriculture, one of the most potentially rewarding options could be farmland investing. Farmland is a tangible asset that offers the potential for stable, long-term returns. 

‍

It’s also an opportunity to support an industry that’s essential (and in demand) to everyday life. 

‍

If you're intrigued by the thought of owning farmland, read our beginners’ guide to how you can invest in farmland. 

‍

Disclaimer: This article is for general informational purposes only and does not constitute investment, financial or tax advice. You should consult with a licensed professional for advice concerning your specific situation.