This article will be about how to invest in farming & agricultural stocks, and why now might be the time to do it. If you haven´t considered this yet I really hope, and got a feeling you will after you have read through this detailed text, ok with that being said, lets look into it!
There is a reason why we (the whole team at Goldretired) consider farming and agricultural stocks to be one of the most profitable (and IMPORTANT) investment right now, the trick is (as always) to know what particular stocks to pick.
We got you covered on how to do that with a Free 4-Part Audio Series Plus a Downloadable Trade Alert on this page.
Ok, with that being said, let´s start to look deeper into this very important (and profitable) subject!
How to Invest in Farming & Agricultural Stocks (Why now?)
Agriculture is the industry that never dies. People will always have mouths to feed, and as populations grow, the demand for food increases.
As the United States operates through a recession, many individuals are looking for ways to make money. People often consider farming to be “recession-proof” because humans will always need food.
However, the coronavirus has broken our food system globally, and food prices will rise dramatically in the foreseeable future. Additionally, Germany’s response to the African Swine Fever, in which they forbade farmers from harvesting crops, thus contributing to the idea that there will soon be a global food shortage.
A global shortage means that the supply will not match the demand, increasing the price of farmland. Farmland has seen a steady growth rate with returns of 11% to 12% over the past 20 years, but these statistics may change rapidly.
People rely on agriculture for food and fuel, meaning there is a permanent demand for farmland. This industry is independent of other markets, and inflation will only cause a higher income for each crop. Farmland will always rise in value.
How to Invest in Farming
Whether you want to buy a farm or purchase stocks, you have a way to get in on the agriculture market. There are plenty of ways to invest in agribusiness, and many companies qualify for this title. As long as the business contributes to farming in some way, it can count for your agricultural investment portfolio.
Directly Buying Farmland
When wondering how to invest in farming, your first thought might be to buy a farm. Owning farmland produces high returns, even if you are not a farmer. Nevertheless, this investment requires large capital upfront, as farms aren’t cheap.
While about 60% of farms are farmer owned, non-farmer landowners rent about 40% of the land. Typically small family farms are tended by the landowners, but the larger ones have lease agreements that can last for several years. These leases mean the farmer’s rent can cover the mortgage and then some, providing an excellent return on your investment.
Investing in Farm REITs
If you don’t have that kind of money, the second closest you can get to owning a farm would be through an investment in a farm real estate investment trust, or REIT.
REITs operate through purchasing and leasing farmland to farmers. There are many benefits to investing in a REIT as opposed to buying a farm.
First of all, they help with diversification, as the investor can have interests in several farms in different locations. They also offer more liquidity, since you can quickly sell your shares on stock exchanges. Lastly, the minimum investment is the price of one REIT share, making it much cheaper to invest in than farmland itself.
Three farm-focused REITs that profit from the population boom include Gladstone Land (LAND), Farmland Partners (FPI), and American Farmland (AFCO). These farmland REITs are currently small-caps, but FPI and AFCO may merge soon, pushing the market cap to over $400 million.
Purchasing Farming and Agricultural Stocks
To make one of the best agricultural investments without investing in farmland, consider investing in farming equipment, goods, and services.
One way to do so is by purchasing stocks, or equities, in the farming and agriculture industry.
Some of the publicly-traded companies in agriculture support growth and distribution, fertilizer and seeds, and equipment. This way, you can support farmland without owning any.
Consider investing in firms that plant, grow, and harvest crops. This sector is limited, but some choices include Cresud (CRESY), Fresh Del Monte Produce (FDP), and Adecoagro (AGRO). Some companies that work with distributing, processing, and packaging crops are Bunge (BG) and Archer Daniels Midland (ADM).
Another one of the most vital aspects of farming is the production and sale of seeds and fertilizers. Some companies include the Mosaic Co. (MOS) and Nutrien (NTR). For equipment, look towards John Deere (DE) and AGCO (AGCO).
Exploring Mutual Funds and ETFs
If you want to buy stocks but don’t know which ones will yield the most profit, you can purchase a farm-focused mutual fund or exchange-traded fund. These mitigate risk by buying shares of some of the above commodities and bundling them into a fund with mid-level returns.
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Mutual funds and ETFs often have fees, so consider these costs before investing. While you will receive a moderate return in the short run, you may end up paying the provider more than you make as time goes on.
Some examples of these funds include Oak Ridge Global Resources and Infrastructure Fund (INNAX), iShares Global Agriculture Index ETF (COW), Fidelity Global Commodity Stock Fund (FFGCX), VanEck Vectors Agribusiness ETF (MOO), and the Invesco DB Agriculture Fund (DBA).
If you are a speculative investor, you may want to invest in commodities to take advantage of the stock market’s price changes. You can look into these assets by purchasing futures contracts and looking into ETFs and ETNs, or Exchange Traded Notes.
While some ETFs and ETNs expose you to specific commodities, like coffee (CAFE), cocoa (NIB), and corn (CORN), others give you several. An example of the basket commodities is the aforementioned DBA, which invests in corn, soybeans, sugar, and wheat futures contracts.
Investing in Farm Debt
If you want to invest in the farmers themselves, consider lending to them through subsidies or loans. Farmers are often in debt because of the high capital of the farming industry. It can take several years to pay off necessary equipment, and farmers often have big mortgages on their land. Furthermore, weather changes greatly impact their ability to sow fields, and if a season is not in their favor, they can struggle to make ends meet.
To cover these and other annual investments, like fertilizer and seeds, farmers need short-term loans. You can help out by purchasing long-term or short-term farm debt either directly or through bonds. The farmer will pay back monthly or quarterly, giving you consistent income.
Remember that purchasing debt comes with a risk: the farmer may not have the ability to make their payments. To be careful, look for a farmer in good financial standing.
Investing in a subsidy program will give the farmer something to fall back on in years of lower crop yields. It can help them remain competitive with imports and maintain their soil quality. However, the government gives most subsidies to commercial farmers rather than family farmers, so research your investment beforehand.
Why Are Food Prices Increasing?
The coronavirus pandemic introduced the world to lockdowns to reduce the spread. While this mandate promoted people’s safety, the lockdown resulted in decreased supply and labor in the food industry.
Global panic over COVID-19 and other diseases, like African Swine Fever, has led to the destruction of food and seeds. As a result, crops are not being planted, grown, or harvested, which sets the stage for a food shortage.
The demand is beginning to exceed the supply, causing food prices to increase.
Countries around the world forced their citizens into lockdowns to prevent the spread of coronavirus. Since scientists knew little of coronavirus’ dangers and people were continually dying from it, this seemed the right thing to do. When implemented correctly, lockdowns might have kept people safe from the virus, but not at the expense of the economy and many industries, including agriculture.
Closing off borders meant countries reduced food exports and imports for fear of contamination. Governments have become concerned about preserving their food sources. Thus they disrupted supply chains globally. Countless migrant workers in the agriculture industry cannot work from the border crackdowns, leaving produce unharvested and food rotting in the fields.
Many countries around the world are facing labor shortages. As such, they have limited their exports. India, Vietnam, and Myanmar have restricted, and in some cases banned, rice exports, Russia reduced grain exports, and Egypt has purchased more grain and stopped exporting legumes.
As lockdown restrictions have lessened, some exports have returned to normal, but as cases climb in other countries, the limits continue.
The topic of extending or reinstating lockdowns as infection rates rise is under debate. On one hand, many people fear the disease and will likely abide by social distancing and mask-wearing guidelines. However, others protest against these restrictions. Some mention how quarantining lowers the immunity, but others worry about the death rate and want to wait for a vaccine.
While industries like manufacturing can reasonably withstand a lockdown, agriculture must follow a harvesting calendar, so labor shortages during certain times of the year prevent some crops from growing.
Farmers have shot pigs ready for slaughter, aborted piglets, and gassed chickens. Dairy farmers have dumped milk, broiler operations have broken eggs to reduce supplies, and labor disruptions caused produce to rot. The U.S. has even been at risk of meat shortages as plants shut down at a worrying rate.
More recently, Germany instituted an agriculture, forestry, and hunting ban as African Swine Fever reached their nation. They prevented farmers from harvesting their crops, leaving them to rot in the field. The pigs who carry this disease eat the corn, and the hunting ban means they will only thrive under these conditions.
Central banks have been fighting off deflation and risked surging interest rates in 2020 due to the massive debt build-up. Unconventional monetary policies ensued.
A short-term solution is governments running monetized fiscal deficits to avoid depression and deflation, meaning the central banks will be printing money. Nonetheless, in the long-term, the permanent negative supply shocks may lead to stagflation.
Today’s crisis is exacerbated by trade restrictions and panic hoarding, disrupting supply chains. The increased global movement restrictions, government interventions, trade wars, protectionism, and money printing only worsen the food shortage and raises prices.
During times of stress, agricultural trade tends to shut down. Countries are sensitive about the prices of staple foods like rice and wheat. These prices affect poor people disproportionately more, especially in emerging economies.
This lockdown forced many people not to work. Unemployment rates soared as people struggled to feed their families. Many people faced a difficult decision between rent and groceries. As a result, they protested. Rising food prices only add to the fire as the ability to eat becomes a precious commodity.
An instance of the reversal of globalization is the ban of foreign seeds on Amazon and Wish. Some people reported receiving unsolicited mystery packets postmarked from China containing seeds.
While no one knows who sent these seeds, the results of planting them were mixed. A Utah plant lab showed that many of the seeds had no harmful effects. Scientists also confirmed these results in New Mexico. Some people ate them and felt fine. Others planted them and found they did not germinate. A few of them grew moldy or exploded. Overall, nothing too out of the ordinary.
Many people received these seeds for unknown reasons, but many others ordered them from China. The USDA told receivers to suffocate, bake, bleach, and burn the seeds, inciting fear of foreign products even though they were not proven to be harmful.
The response of Amazon banning international seed sales contributes to the idea of “Problem, Reaction, Famine.” The problem was people receiving foreign seeds; the reaction was prohibiting the product’s selling, which lessened the food supply. While this is a small instance, it insinuates a xenophobic idea of imported foods.
Australia is running out of homegrown rice, meaning they will need to import rice soon. The low crops result from poor water management that favored cotton over rice, and now they must increase their grain imports.
Meat factories are also facing closure from the lowered livestock supply and labor, impacting meat production.
Instead of managing the food supply, governments are working on upcycling food waste into edible products using an insect-based protein. Police have entered farmer’s markets, scaring people trying to buy groceries. Some have predicted that this is a way to prepare people for the upcoming food shortages.
Countries have stopped exporting to feed their people, even though this hinders their food supply as well. As these exporters are running out of crops, they rely on imports, but deglobalization has made countries not want to trade food, creating food shortages.
When we talk about climate change, we are talking about the planet’s natural changing climate, not anthropogenic global warming. One aspect of climate change is solar cycles.
The current solar cycle, named cycle 24, has us entering a decade long cooling cycle as we reach a solar minimum. There have been no sunspots for a prolonged period, showing that the sun is lessening in solar activity.
A cooling climate will reduce crop yields, increase food prices, and increase demand. Goods and services will cost more, and the need for products that cultivate agricultural productivity will soar.
In 2011, the Farmer’s Almanac predicted that the quickly fading sunspots indicated that the sun would try to compensate for anthropogenic global warming by lowering its activity levels. Nevertheless, the current solar cycle has run its course faster than expected. Since 2019, there has been almost no solar storm activity, indicating that Earth’s climate will begin cooling.
An extreme example happened in 1645 when the solar cycle stopped for 70 years. This period was called the Maunder Minimum. The Maunder Minimum’s characteristics included bitterly freezing winters, abandoned fishing settlements, and extra icebergs. Since the average global temperatures are warmer than they were in the 17th century, we are unlikely to enter another mini ice age.
Nonetheless, a drastic drop in temperatures could freeze many crops, reducing the global food supply.
The Problem With ETFs
The problem with using ETFs to track crop prices is that they focus on commodities. Futures back these commodities, and they do a poor job over the mid- to long-term in tracking commodity spot prices.
There are inherent costs of rolling from one contract to another, and the design of ETFs practically means they will decay with time. As such, they are best for short-term trading, unless you want to keep paying fees to the providers.
For more information on tracking food stock prices in the long term, look here.
Benefits of Investing In Agriculture
Farmers are some of the most overworked and underpaid laborers at any given time. Shifting weather patterns could mean they don’t earn much of an income one year.
The best agricultural investments offer stability to the farm infrastructure. By investing in farming, you provide financial aid that improves a farmer’s efficiency and effectiveness. They can buy better equipment, seeds, and fertilizers. The investments help in all stages of farming.
Investing Helps Income Consistency
The problem of inconsistent income is also alleviated. Agriculture is supposedly the recession-proof industry, but a bad economy can hurt a farmer’s paycheck. Investments help them to keep working, even if a natural disaster destroys their crops. With the solar minimum, reduced labor, and agricultural shutdowns, farmers need extra support now more than ever.
Investing Helps Increase the Food Supply
Additional financial support can increase the food supply, allowing farmers to grow ample crops to supply local markets and export to foreign markets. If the deglobalization trend continues, farmers can diversify their plants to feed their home country. A trend towards protectionism can help create more local jobs as more people will need to grow food.
Investing Helps the Land
Agriculture investments can encourage farmers to leave their farmland vacant for a year or more to help the soil restore itself. Healthy soil is more efficient during the growing season, possibly increasing the farmers’ income during the fruitful years.
Since the United States imports much of its produce, American farmers often have to compete with extraordinarily low food prices that would not provide them enough income. With subsidies, they can price their crops competitively while still earning a comfortable living.
Investing Helps You
In terms of your benefits, agricultural stocks give you access to huge companies and provide industry exposure. You can witness high-level trends and see the potential of technological improvements in agriculture.
You can get access to farmland assets or gain exposure to a food processing and production business. If you want to gain experience with a single food type, like grains, you can also get massive exposure to this industry’s trade and logistics.
Purchasing farmland has a potential return on investment, which is incredibly high in developing and emerging areas. The possibility of infrastructure projects, like highways or other government constructions, improves ROI because it increases property prices.
Farmland does not depreciate over time, unlike typical infrastructure investments. Building quality deteriorates, but land stays practically the same, with the exception of natural disasters. You can always use farmland for varying purposes, within legal boundaries.
Investing in funds diversifies your portfolio vastly, be they ETFs or mutual funds. These are excellent low-risk choices, but you will not gain exposure to large-cap stocks.
Drawbacks of Investing in Agriculture
Investing in subsidies can reduce diversity in the food chain. Most available ones do not cover all products, so farmers who need the additional income will need to grow one of the dictated crops. This process homogenizes the food supply and eliminates the advantage of reducing food imports.
Little diversity harms soil quality as it creates nutrient shortages. Crop rotation practices are recommended to most farmers to cultivate soil fertility, but having to grow the same thing to make money goes against this. Farmers compensate with fertilizers and chemicals, but these chemical additives harm the soil further, and they can creep into bodies of water and the food supply. These chemicals may put the environment and people at risk.
Farmers who opt to grow crops not covered by subsidy programs will earn less money and struggle to make a living. Many investments go towards commercial organizations rather than family farms. While most farmers live above the poverty line, they do not receive additional income and are frequently at risk of crossing it. The government usually gives these subsidies to companies that do not need money instead of people that do.
United States subsidies mainly cover corn, wheat, rice, soybeans, and cotton. The country imports other forms of products overseas for their lower costs.
In cases where someone else owns the farmland, the farmer will not receive the investment, but instead the landowner. The farmer must then pay rent they can barely afford to someone else who earns extra cash from the government.
As far as agriculture stocks go, individual equities do not have all of the protections offered by investments directly in farmland or farming. One benefit of investing in farmland is that it has no correlation to other asset types, so the market will feel a minor effect if the stock market crashes.
Investing in farm stocks is still investing in the stock market, so if the broad market suffers, the farm equity will as well. You are also limited to choose from individual assets, and your stock will often be for just one commodity.
Many agriculture stocks offer a tangential link to the growing of crops, so if you predict that a particular crop will boom in production, you may not receive much financial benefit.
A problem with buying farmland is the high initial cost. In some places, you cannot purchase farmland unless you are a farmer, and it is not easy to convert the land into anything other than a farm. The soil may not be able to withstand housing infrastructure. If farmers who rent your land are unable to yield successful crops, they may not be able to pay you, and you can lose money.
Investing in funds limits you to small-cap stocks so that you will get a low dividend yield. While this is the case for most ETFs, it is especially true in agriculture, especially when compared to private equity investments. Fund investments work best in the short run, but they do not make for suitable long-term investments.
Now you Know How to Invest in Farming, But Should You Do It?
We have covered a lot of ground in teaching you how to invest in farming. Food prices are most likely going to rise dramatically in the near future as we face shortages. In that case, it is best to invest now before the prices rise too much.
Many countries have limited their exports, and the trend towards deglobalization and protectionism means that they may also restrict imports.
The lockdown has had its pros and cons. While on the one hand, it helped protect people from spreading the coronavirus, it also forced labor shortages that harmed the food supply. By not being able to plant in the spring and summer, certain crops will not be grown and harvested during the summer, fall, and winter.
Farmers had to euthanize their livestock because it was too expensive to keep them alive. Crops were left to rot in fields. Meat and produce packaging and processing facilities closed down as there was no one there to run them. The Australian government favored supplying water to cotton fields rather than rice, and now they may run out by Christmas.
Soon, people may have to turn towards synthetic foods as farmers cannot provide adequate supply. As seen by the Chinese seed scare, people are becoming afraid of imports that turned out to be mostly harmless. Countries want to feed only their people, so this is the optimal time to invest in your country’s farming industry.
The demand for food will continue to increase as the populations and prices rise. Supply will struggle to meet people’s needs. While this case is far from ideal, it is a wise investment.
Whether you want to invest in futures, stocks, ETFs, ETNs, REITs, or buy farmland outright, an agriculture investment is a fantastic way to diversify your portfolio. Equities will provide a better investment return, but ETFs are a more suitable choice for a small, short-term income. During this period, farmland is a somewhat questionable purchase, but it is generally a great way to make money.
Because price changes are inevitable, the best investment to make at this time is in futures contracts. You can play price changes for food products without having to be a farmer.
The agriculture sector is a fantastic choice for any investor looking to try something new. Agribusiness grows faster than most other markets, and this industry has existed for thousands of years. The market will continue to grow with populations, and rising demand for food means your stock values will increase considerably.
There are many options when it comes to farming investments. While owning a farm is the most lucrative, it requires a high initial investment. Owning a farm-focused REIT will best imitate those returns with a lower initial cost.
If you want more exposure to agriculture, investing in stocks will broaden your portfolio. You can choose to invest in specific commodities, like coffee or cocoa, or invest in something more general, like grains. An ETF has little risk and will provide modest returns. Futures, ETFs, and ETNs will help you profit from changing prices.
You can directly support farmers during this troubling time by purchasing their debt, investing in subsidies, or offering loans. While these methods are less likely to give you financial returns, you will help protect these farmers’ careers and help them support their families.
No matter what, make sure you find an investment vehicle and strategy that works best for you, and consider getting a financial advisor to develop a plan. By making the right investment decisions, you can protect your future with additional income.
We may soon live in a society that is short of real food. In this event, those who have ownership of food will have all of the power. Before making an investment of this caliber, weigh the positive and negative aspects with great care, and make sure it is what you genuinely want to do.
I hope you found this article on how to invest in farming & agricultural stocks in the best way to be helpful. Please share your own thoughts and experience in the comment section below. Also, please share this with your friends as they might want this info also.
I wish you the best!
Michael, and the rest of the Goldretired team