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The world’s population is growing and rural areas are dwindling. Savvy investors see this as an indicator that demand and associated prices for agricultural areas and farmland are set to rise. Investing in agriculture can offer opportunities for investors that are ripe for the picking (pun intended).
This article will give you a better understanding of why agricultural investment can be worth looking into as well as the various ways to invest in agriculture either as a passive or active investment.
What is an agriculture investment?
An agricultural investment is any investment into agricultural land or into a business that supports the agribusiness industry. Agricultural land is also referred to as farmland, arable land, crop land, or cultivated land. Agribusiness is any business that deals with agricultural produce or services necessary in farming. This can include businesses like seed or fertilizer distribution, timber, tractor companies, and processing or packaging facilities.
Why invest in agriculture?
There is only so much land on our planet. Arable land, land sufficient for traditional farming, is limited to areas with adequate moisture, soil, and temperature. One large influence of the continued and growing demand for agricultural land is the fact that the world population has quadrupled in the past century, and it's estimated the demand for food will increase between 59% to 98% by 2050.
According to the USDA, farmland is now worth 52 times what it was worth at the start of the century. Regardless of whether we're in a booming economy or a depression, people still need to eat. Considering the past performance and necessity of food production on a global and local level, agriculture can hold tremendous opportunities for real estate investors.
Ways to invest in agriculture
There are several ways to invest in agriculture, providing opportunity for passive or active participation.
Own land and farm directly
Some investors who have an interest or passion for farming may choose to invest in agriculture actively by owning the land and farming it themselves. While this method of investing in agriculture is by far the most time intensive and requires substantial knowledge on how to farm land properly, it presents a unique opportunity to reap the financial benefits of agriculture while pursuing alternative farming practices, such as regenerative agriculture or a smaller-scale sustainable agriculture operation.
In many rural or farming areas, smaller parcels of depleted land can be purchased for pennies on the dollar, which many larger farming operations will overlook. The farmer can heal the land using sustainable development practices, in turn opening up the potential to help reverse climate change by sequestering carbon, leading to a higher crop yield than traditional farming operations.
Not all farmland models necessitate active farming of perishable and annual crops. If you're comfortable with a delayed return on capital and would like to avoid creating an actual job for yourself, you might consider planting timber crops. They require minimal attention, offer tax incentives, and typically have a strong return on investing (ROI).
Own land and rent to a farmer
An alternative to farming the land directly is buying the land and renting it to a farmer. According to the USDA, 39% of farmland is rented. It's a hands off way to invest in farmland and agriculture without having to do the actual farming yourself. This allows the landowner to pay down the mortgage on the farmland while allowing the farmer access to land without having to come up with the money to purchase it. They are typically longer leases, which means a stable and low-risk way to invest.
Investors aren’t subject to only purchasing raw land or farmland in order to run and operate an agriculture business. Investors can choose to establish urban or indoor agriculture farms, either doing the work themselves or leasing it to a third-party farmer.
Invest in agriculture through crowdfunding or partnership
If you'd rather not own the farmland yourself, there are several options for investing in agricultural projects. There are a variety of real estate crowdfunding and peer-to-peer lending platforms where you can loan money directly to farmers in need from around the world, like KIVA, Steward, or Harvest Returns. Some platforms will require you to be an accredited investor to participate, while others allow you to participate for as little as $25.
Buy stocks in agricultural companies
Purchasing stock in farming- related businesses offers the risk-averse investor exposure to agriculture without the risk of crop failure or managing the land themselves. You can purchase stock in publicly traded companies for fertilizer, farm equipment, seed companies, packing operations, distribution services, biotechnology, or other related industries.
Buy stocks in agriculture ETF
Exchange Traded Funds (ETFs) are a way to invest in commodities. In this case, this means contracts for crops that will sell in the future. Normally investors need a tremendous amount of understanding to invest in crop commodities, but this approach allows you to invest in an ETF, which is a group of different commodities hand selected and managed by a fund manager. Take a look at our picks for the top 5 agriculture ETFs to invest in currently.
Invest in a REIT
A real estate investment trust (REIT) is a company that owns or finances income-producing real estate, including agricultural land. The majority of the taxable income is returned to the shareholders as dividends, which can offer a lot of upside to increased demand without much risk for the investor. There are several agricultural REITs that allow investors exposure to a diversity of agricultural assets, meaning you won't put all your money into one operation. There are REITs that specialize in timber or farmland, for example.
Historically, the price of food increases over time, which means it can be an effective hedge against inflation and provides a safety net against the growing trend of food insecurity in our global economy. As with any investment, due diligence and a proper understanding of what you're investing in is critical. You may wish to consult with a Realtor in the local market, accountant, or attorney after doing your initial research to get more detailed information on the specific implications of the agriculture investment you're interested in.
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