Investing in agriculture directly may look like a wise strategic move at first. Regardless of whether the economy is weak or strong, people still need to eat. This is why farming and agriculture are considered recession-proof investments, except when armed conflict or war arises. Furthermore, as the world’s population is constantly growing, we will need even more food to be able to feed everyone.
Buying agricultural land can be a good investment strategy but is certainly not for everyone. Farming not only requires a substantial capital investment but leasing and operating a farm can be a costly and time-consuming endeavor. Fortunately, there are plenty of good ways to invest in agriculture such as mutual funds, ag ETFs, stocks, and farm REITs.
Agriculture or farm stocks give investors access to major publicly-traded companies, including those involved in growing crops and businesses supporting farms. Investing in businesses engaged in crop and food production is one opportunity to explore. Examples of such publicly-traded crop production companies include AppHarvest, Adecoagro SA, and Fresh Del Monte Produce Inc.
Another option is to buy shares in various sectors that provide supporting activities. There are hundreds of thousands of companies that specialize in packaging, processing, distribution, and other supporting activities. Such sectors include crop processors and distributors, equipment manufacturers, and seeds and fertilizer producers. Many businesses are engaged in the production of seeds and fertilizers, for example, including companies such as FMC Corp, Corteva Agriscience, and Scotts Miracle-Gro. The sector was in haywire last year due to severe weather, new export-licensing regulations, and the high cost of natural gas. However, the ongoing conflict in Ukraine has made carriers shun Russia, which is a major fertilizer exporter, causing stocks to rise to record levels.
There are also companies that specialize in supporting activities such as processing, transport, and distribution of crops. Some examples include Bunge Limited and Archer Daniels Midland.
Note that while stocks provide good equity returns, the stock markets can be volatile due to adverse conditions, including economic, market, regulatory, and political developments. Foreign securities, in particular, are subject to multiple risks such as political, economic, and currency exchange rate risks. The agriculture and farming industries can be affected by government regulations, global competition, export and import controls, world events, consumption, and commodity prices. For all the reasons above, stocks are considered one of the riskiest investment products.
Farm real estate investment trusts invest in a portfolio of farmland and then provide farmer-friendly leases. This is the closest you can get to operating an actual farm with the added benefit of significant diversification. REITs provide investors with the opportunity to own stocks in more than one farm and across geographies. Also, stocks have a better liquidity and can be quickly traded on the major exchanges. Unfortunately, there are just a few farm REITs to invest in, including Gladstone Land Corporation and Farmland Partners Inc.
Agricultural Mutual Funds
Some mutual funds invest in agriculture and farming businesses as part of their portfolio. The goal is to achieve long-term capital growth by investing indirectly or directly in equity-related securities and equities. Similar to stocks, investing in mutual funds can be risky as the value of securities can fluctuate. Adverse events such as floods, droughts, and fires can affect the commodities and agricultural markets and negatively impact demand and supply relationships.
Soft commodities are actually futures contracts whereby the underlying commodities are grown and not mined or extracted otherwise. This category covers a wide range of agricultural products, including livestock, wheat, rice, sugar, cotton, coffee, cocoa, and soybeans. Some exchange traded funds and notes give exposure to a single commodity, whether grains or corn, while others include a basket of commodities. The Invesco DB Agriculture ETF, for instance, specializes in sugar, soybeans, wheat, and corn futures contracts. The fund is only suitable for investors with a high-risk profile as it trades in volatile markets. The iPath Bloomberg Agriculture Subindex ETN also invests in a basket of commodities, including cotton, coffee, sugar, soybeans, wheat, and corn. As the ETNs have no principal protection, they are riskier than other types of debt securities. As unsecured debt securities, ETNs are not guaranteed or an obligation, indirectly or directly of a third party. In general, due to risks associated with pathogens and adverse weather conditions, soft commodity features are riskier and more volatile than other debt securities. Harvesting, seeding, and weather forecasts, for instance, can cause fluctuations in oilseed or grain prices, which can affect contract values based on delivery dates.
Using Agricultural Commodities as an Inflation Hedge
Agricultural commodities can be a good investment when inflation rises quickly. The price of agricultural products, industrial and precious metals, gas, and oil rises with inflationary pressures. Due to the fact that these commodities could be volatile markets, it is important to carefully choose the products you would invest in. Also, solid investment firms can be a good choice in uncertain times but commodities only make for a small percentage of the final product they sell.
Corn, soybeans, and livestock are considered some of the best farm commodities to invest in. Corn, for example, is a staple as livestock feed and in ethanol production. Over 1.2 billion metric tons are produced globally per year.
Investors use a variety of futures contracts and ETFs to trade for profit. When predicting price fluctuations, there are different factors they take into account, including oil and gas prices. When prices increase, the ethanol market sees a surge in demand, which results in a higher demand for corn. Also, there are more price fluctuations during the summer months due to the fact that corn is a warm-season crop. If crop-damaging storms occur, this may impact supply and market prices.
With livestock trading, there are different factors that play a role. One is the cost of feed such as soybeans, wheat, and corn. When prices are high, farmers may choose to shorten the period during which livestock is fed, resulting in excess supply. Illnesses that affect livestock, including outbreaks caused by parasites, bacteria, and viruses, also affect demand and supply.
Finally, soybeans are used in margarine, cooking oils, lumber, and building materials. Due to the fact that they have uses in a variety of food products, any news about adverse health effects could result in a low demand.