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How To Invest In Agriculture



Wall Street is making serious investment moves in the agricultural sector. The Des Moines Register recently reported that Wall Street investors are putting money into farmland, buying up productive acres with an eye on future profit potential. Institutional investors, including hedge funds and pension funds, wielding $10 billion in capital, are among those that have spotted the ripe potential of the agricultural sector, according to information from the Oakland Institute, a progressive think tank located in California.

Infographic courtesy of Farming First.

Infographic courtesy of Farming First.

Factors Fueling Agricultural Investment Growth

There are a few factors driving this investment trend. The simplest of these factors comes down to a basic biological imperative – everybody's got to eat. The world population continues to grow, increasing the demand for food. The economic growth experienced in developing nations and emerging economies has also served to increase the demand for agricultural products, as those benefiting from that economic growth have more money to spend on food.

Global economic uncertainty is another contributing factor. Many investors are attracted to the comparatively hard assets found in the agricultural sector. These assets offer more security than the various investment vehicles produced by the financial industry's Wall Street wizardry, such as mortgage-backed securities and credit default swaps, security that is quite attractive after the losses so many investors sustained after the 2008 sub-prime mortgage and lending melt-down and the subsequent economic slowdown.

In Down on the Farm, Wall Street: America's New Farmer, Oakland Institute writer Lukas Ross pointed out that the demographics of the modern farming industry will in all likelihood put a lot of American farmland into play over the next couple of decades. According to data from the U.S. Department of Agriculture's Census of Agriculture, the average age of an American farmer is 58. And, it's not just an American phenomenon. In January 2015, The Economist reported a late 50s average age for farmers in in Europe and New Zealand too.

There are fewer younger people going into farming than in times past, so when these farmers retire, many will be selling off their farms. This will be a valuable asset class because with the increase in world population, there has been a decrease in arable land. That decrease combined with the rising demand for food yields plenty of opportunity for the savvy investor.

“Direct investment in farmland on a global scale can provide diversification, inflation protection and return potential,” according to the Teachers Insurance and Annuity Association-College Retirement Equities Fund. However, direct investment in farmland is just one of many ways to invest in agriculture. This investment sector is an accessible one, with many investment opportunities available. There's money to be made, not just for the big investors on Wall Street, but also for smaller scale individual investors.

Stocks A Good Introduction To Agriculture Investing

Although the commodity and futures markets are among the oldest means of investing in agriculture without actually getting your hands dirty, these are not the best markets for an investing beginner. It is better for a beginner to enter the agricultural sector via stocks, a simpler and more familiar investment route. Also, you can get started investing with a lot less capital than is likely in other parts of the agricultural sector. As little as $1,000 is enough to give you a good start.

There are a number of publicly traded food growers, such as Fresh Del Monte Produce, Inc. (FDP), Calavo Growers, Inc., they grow avocados, and Dole Food Company (DOLE). You could invest in agricultural essentials, such as seed, farming equipment, fertilizer and irrigation. Potash Corporation of Saskatchewan (POT) and the world-renown Deere & Company (DE) are good examples of companies of this type. Companies like Archer-Daniels-Midland (ADM) and Bunge Limited (BG) process and distribute agricultural products.

Do your research. Learn about the history and performance of the companies you invest in, but go a little farther than that. Start learning about the agricultural sector as a whole, keep up with current events and how they may potentially impact the agricultural sector. These sorts of things will help prepare you to move beyond stocks into investments with a higher rate of return, developing an investment portfolio with a diverse agricultural investment section.

Mutual Funds That Invest In Agriculture

If you try this type of investment, you will be one of many investors putting their money into an investment pool. A money manager will invest the money and the gains and losses are distributed throughout the investors periodically, at set points in time established by the contract agreement between you and the investment firm you are working with. Mutual funds that are made up entirely from the agricultural sector are relatively rare, but that offers the important advantage of portfolio diversification. Fidelity Global Commodity Stock Fund (FFGCX) and the CI Global Infrastructure both offer these types of mutual funds. Carefully review fees and performance before making a final decision regarding which fund you want to entrust with your investment dollars.

Edge Into Commodities And Futures With ETFs

An ETF is an exchange-traded fund. These funds fall into two general categories, those built upon stocks, typically utilizing numerous agricultural stocks, and those built upon futures contracts for a specific type of economy. These allow for diversification and, if you choose an ETF that is more about futures, then you have the opportunity to learn more about futures. Ask questions and seek knowledge so you can gain the knowledge and confidence you need to successfully invest in the commodities and futures markets, although it should be said that in general there is a lower risk with the ETFs. Two major players in that investment market are PowerShares Global Agriculture ETF (PAGG) and Market Vectors Agribusiness ETF (MOO).

Invest In Farmland Without Farming It

The conditions are ripe to see agricultural land move up in value over the next decade or two. There are a number of ways to invest in farmland without having to come up with a huge amount of capital or farm it. You can invest in a real estate investment trust that focuses on agricultural real estate, buying shares in farms and other agricultural operations. REIT shares can be bought and sold via stock exchanges and, other than the fees associated with the transaction, you can get into the game for the cost of a single share.

Consider A Little Small And Local

Once you get started in investing in the agricultural sector and become more knowledgeable about the circumstances likely to lead to a reasonable or, with luck, robust return on your investment, you may want to localize a portion of your investing. The local food movement is a strong one and does have a certain degree of influence over the buying patterns of a growing segment of the population. Supporting local farms by buying actual farm shares or by purchasing crop shares does have its risks, but can be a smart move financially. You can learn a lot by being involved on a local level, gaining information that can help you succeed in bigger investments in the future.

Agricultural Commodities and Futures

Once you've mastered the less risky realms of agricultural investing, hopefully increasing your capital significantly, you should have gained enough knowledge about the agricultural sector to be ready to engage in the more challenging and higher risk commodity and futures markets. There are funds that invest specifically in commodities, whether in a single commodity, such as coffee, wheat, corn, or livestock. There are also commodity focused funds that invest in groups or baskets of commodities.

The oldest type of investment, done for as long as crops have been deliberately grown in surplus for trade, is commodities futures, agreements or contract to deliver or purchase a specific commodity at an agreed upon point in the future at a specific, preset price. The rise and fall of market prices impacts profit margins. Speculation in these markets can drive prices to extreme highs and lows.

Speculators have been blamed at numerous points in history, including today, for driving food prices out of reach of the world's least advantaged, contributing to widespread hunger in certain regions. While activist groups do try to fight the practice, other than legislated price controls, speculation is virtually impossible to prevent. Even in societies that do not operate in a free market system, an active black market prevents the eradication of speculation and its impact on the price of farm goods.

Many expect to see agricultural commodity prices rise and continue increasing over time in response to increased demand. For these investors, the profit potentials outweigh the inherent risks involved with this type of investment. That is a decision that each investor should carefully weigh for himself or herself. That's also why commodities investment should form just a part of a well-rounded and diversified investment portfolio.

There Will Always Be Risk

From the very beginning of agriculture, there have been inherent risks in investing in it, whether investing labor and sweat or investing money. Sometimes the weather doesn't cooperate. Storm clouds deliver destructive downpours instead of gentle soaking rains. Droughts destroy crop yields for years at a time. Winter stays too long or arrives too early. On occasion, a natural disaster can wipe out an entire season's crops. However, that doesn't stop the next season's investment because agriculture is essential. We all have to eat.

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