So You Want to Be a Farmer: Investing in Agribusiness Today
From paddock to portfolio, here’s what you need to know to harvest solid returns from a growing market.
Compared with other investment opportunities, putting money into livestock or soybeans or farmland might once have seemed an exotic risk. Not so anymore. Today, there’s money in the soil.
Agribusiness has become a far more attractive investment option thanks to developing global and regional trends. One such trend is a swelling world population. Humans simply have to eat, and many nations are ramping up food production or importation to meet the demands of their hungry citizens.
Another trend is the rise of the middle class in Asia. With more disposable income, this demographic is spending more on food options. They’re dining out more often, for instance, and purchasing more products for home consumption that are typically associated with Western affluence. Steak and imported seafood are two examples.
One other factor influencing investment is the growing pressure on farmland conversion due to urban sprawl, making these properties more strategically important.
All these factors, plus others cited below, add up to a burgeoning market. Within the United States for instance, return on private investment in individual farmland properties was expected to reach 7.07 percent in 2018 with a total market value of almost US$8.7 billion. In Australia, agriculture production was valued at AU$62.8 billion in 2016-17, representing more than a quarter of the country’s 1.9 percent of GDP growth during that time.
Those figures speak to the wide variety of investment opportunities. Whether you’re interested in becoming an owner-operator of a farm, an arms-length investor in farmland properties, or are looking at commodities like corn or cattle, now is the time to plant a stake in the ground. Here’s what to consider.
In 2017, investments in the AgTech sector totaled US$10.1 billion.
1. What Do You Want to Grow? (Plan Your Strategy)
Establishing a strategy appropriate to the type of investment you want to make comes first. Do you want to invest in a commodity? If so, you have a multitude of choices, such as corn, soybeans, wheat, cotton, pork and beef. You’ll need to be aware of a number of variables, like rainfall totals, logistics and key market trends. So if storm clouds make you nervous, take that into account. As an alternative, perhaps you want to hold on to capital assets and look for long-term returns. In Australia, for example top farming properties grew by 10.3 percent for the full year ending September 2017. Whichever you choose, you’ll need to know your short-term and long-term income requirements, your capital growth expectations and investment time frame with eventual exit points.
2. Get Your Cattle in the Yard (Gather the Right Assets)
If you’re interested in becoming an owner-operator, you’ll need to acquire your assets. Suppose you want to be a milk producer. In that case, you’ll obviously need to acquire a dairy farm and cows. Managing your expectations is important: Getting a return on investment with farming requires patience — livestock and crops each take time to grow before they can be taken to market.
3. Seed Your Land (Secure Your Financing)
How will you finance acquisition of the assets? You have to make sure your capital stack is appropriate for the strategy and the assets you are targeting. Start with the fact that farming requires a very large capital commitment. (Your commodity of choice and required returns will point to the acreage or land you need.) For those simply looking for an investment, there are real estate investment trusts (REITs) solely focused on farms. These REITs allow investors to have an interest in many farms across a wide area. There are also farming-related exchange-traded funds (ETFs) to diversify your portfolio.
4. Hire Your Farmhands (The Management)
Good management will find a way to get good results during the tough times and do even better in good times. Remember: A good manager is one who focuses on delivering the financial returns you’re after rather than winning the prize for the biggest pumpkin or prized bull.
5. Fertilize Your Crops (Implementation)
You’ve picked out your land, lined up your determined financing strategy and secured your management. Now is the time to task your management team with bringing your strategy to life in the way you envisaged.
6. Reap What You Sow (Monitoring results)
Make sure you stay on top of how your asset is performing — you have a vested interest. Farming is an investment opportunity measured in increments of five- to 10-year cycles. You’ll likely have good years, a rough patch and a boom year — managing through variability is key. If you’ve got the patience and determination, you’ll likely harvest solid returns.
AgTech Growing Strong
One other indicator about the allure of agribusiness today is the rise in global startups dedicated to food technology. In 2017, investments in the “AgTech” sector totaled US$10.1 billion, an increase of 29 percent from 2016, according to research firm Agfunder. The startups involved cover a range of purposes: climate sensor analytics, artificial intelligence in the measure of food quality and freshness, and IoT (internet of things) monitoring of farm machinery are three examples.
From REITs to mutual funds, from commodities to owner-operator opportunities, investors in agribusiness have acres of alternatives to choose from today.
Senior Managing Director