How can I invest in agriculture? So far, trends reveal that consumers are likely to experience tough times in the future with the anticipated rise in food prices, but investors are simply being presented with an opportunity to reap big. The ever-increasing global population along with the rising middle-class in nations such as China and India are influencing the demand for food. Unfortunately, all this is happening at a time when we are anticipating a very major food crisis resulting from political and climatic factors. That said, however, most investors are still viewing Agriculture as a sector that is booming, and one from which they can continue reaping steady returns.
I did some research to establish how the money in the agriculture sector is being made, and this is what I came across:
These are popularly referred to as ETFs. Over the years, some of the most notable investment commodities in the agricultural industry have been soybeans, rice, and corn. With these, investors make their income by purchasing and selling contracts for the future crops at fixed prices.
Agricultural commodities are however quite complicated and bear a high risk. ETFs present investors with a chance to go about the money-making process without having to put in much work or to stress much about the outcomes.
ETF shares usually trade like stocks, with the market value of the commodities tracking market indexes. Investors can purchase and sell their ETF shares as they so, please. The fund management fees involved are in this case quite minimal. The capital gains taxes are usually paid only after the entire investment is cashed out.
Throwing one’s money into agricultural commodities may present very significant risks. Disasters ranging from drought to frost can lead to very massive losses. Risk-averse investors usually prefer to channel their money into stocks. The stocks usually range from those that deal with farming supplies and equipment.
At the end of the day, farmers need high quality fertilizers, the right seeds, and the best machinery to ensure that they meet the rising demand for food. The sales of major agricultural supplies and equipment companies such as John Deere and Mosaic are expected to be on the rise in the near future as the farmers try to keep the demand and supply curve balanced. Investors can with such knowledge invest in agricultural supplies and equipment company stocks, with the hope that market prices will favor them.
The rising demand for food has led to farmers looking for ways in which they can improve the production of crops. Biotechnology has given scientists their ability to breed plants that have a stronger resistance to pests and to produce pesticides that have an impressive nutritional profile ( such as having less fat). Huge Biotech firms such as Monsanto and Ceres are already playing a major role in the biotech industry in as far as agriculture is concerned.
There are also some biotech mutual funds that investors can consider. Investors can also go with penny stocks offered by biotech startups whose main aim is to obtain capital. All that investors need to do is to lay their hands on such companies’ Over The Counter stocks. There are brokers who make this possible by negotiating the sales with dealers or the market makers.
Thing is, however, OTC stock investments in the biotech sector are quite risky, but they also present significant gains to the winners of the day.
As a retail investor, you can also earn an income by putting your money into farmland. There are small firms and funds that are usually managed by real estate investors and farmers who are well-versed with this industry, who usually make it possible for investors to earn an income through farmland.
With this strategy, investors usually earn an income in the form of land rental fees from the farmers who produce their crops on the parcels. In places like Iowa, the price of one acre of land was at $6700+, up from $1900 in 2001. As much as there have been significant concerns with regards to the inflated prices of the farmland, it is known that the amount of money investors can reap is linked to the value of the crops that are produced in it. As much as there are some long-term rate fluctuations, farmland returns are expected to stay fairly steady in the near future.
What are the driving factors that determine the nature of returns in the agriculture sector?
We have already established that there is an increased demand for food on a global scope. Investors are banking on this one known fact to cast their nets. That said, however, they are also looking into other fundamentals, including:
- The rate of urbanization and how fertile land is being destroyed to pave way for buildings.
- The changes in climate and solar cycles.
- An increase in the number of people in the middle-class sector- fueling an increase in the demand for meat protein.
- Fertilizer efficiency- aimed at increasing crop yields.
- Pesticide and herbicide resistance- there are insects and weeds that have gradually become immune to the poisons meant to kill them
- Lack of clean water- most water sources are already polluted and the amount of money that should go into presenting treatment solutions is quite high.
What move should you take with all the information presented above? Spare some time to go through this 4 part agriculture series.
I hope you enjoyed this article that was aimed at showing you some ways in which you can invest in agriculture. There is some more information about the next steps that you should take in the recommended 4 part series that covers the best approaches to use to ensure that you profit. Remember, people have to eat, and the demand for food is actually on the rise, thus all you need to know as an investor is where exactly you need to invest your money.
I wish you the best,
Eric, investor, and team member of the Gold Retired team!