A Primer for Investing in Agriculture

Long, long ago, some ancient human decided that planting seeds and reaping the produce was a safer approach to food production than chasing larger, stronger and toothier animals. Since that time, the agriculture sector has flourished, withered, rebounded, crashed and bounced back again. With each passing year, the world is seeking to feed more people with less land, so the interest in agriculture production as an investment has grown right along with the world population. In this article, we'll look at the agriculture sector and the different ways investors can approach it.

SEE: Grow Your Finances in the Grain Markets

Like all sectors, agriculture is really a spectrum of activities that overlap with each other and even with other sectors. The simplified version is that producers grow crops and raise livestock to sell to processors, who prepare and package the product before it ends up on the grocery store shelves. Producers and processors are in the agriculture sector, while the retailers are part of the retail sector - nice and clean.

However, the reality is that the agriculture sector also holds agribusiness companies. There is no hard-and-fast rule on what constitutes an agribusiness, but if a company is pulling half of its revenue directly or indirectly from agriculture, then it is generally considered an agribusiness. To see how this can get confusing, consider a company like PotashCorp, which officially merged with Agrium to form Nutrien in early 2018. Potash was basically a mining company, pulling stuff out of the ground and selling it. The stuff it pulled out, however, was fertilizer, so the big buyers were farmers. Therefore, Potash was an agribusiness despite the fact that it looked suspiciously like a mining company.

The same is true for manufacturers like Deere & Company (tractors). At first glance, they don't have anything to do with growing corn or slaughtering pigs. On the plus side, the range of companies with interests in the ag sector can open up interesting plays on the "people gotta eat" theme that sometimes drives ag investment.

Agriculture is one of the oldest industries in the world, so it is not a big surprise that there are a number of different ways to approach investing in it.

SEE: Natural Resource Investing

The futures market was originally created to reduce some of the risks facing producers in the agriculture sector. Commodity investors have been trading contracts for corn, cotton, hogs, cattle, soybeans, sugar and many other agriculture products for centuries. Futures offer investors an easy way to play price changes for agricultural products, without actually buying a farm and putting in all the hard work. That said, futures may be a bit intimidating for a beginner. It is best to learn about the market and study historical price movements before you venture in. You don't want to wake up one day and find someone dropping off your 50,000 pounds of cotton.

SEE: Futures Fundamentals

The overall trend in agricultural production for the past half century seems to be go big or get out. This consolidation of farmland by fewer and fewer people in order to reap economies of scale has carried over to the business side. Many of the agricultural stocks are huge companies that have global reach. You can pick among agricultural chemicals companies like Nutrien and Monsanto, equipment manufacturers like Deere and Kubota, or even processors and distributors like Tyson Foods.

Agriculture stocks are just like any other stock and can be evaluated based on assets, P/E, dividend yield or whatever metrics an investor chooses.

If you want to invest in the broader sector in the hopes of a fundamental shift that drives up the price of the vast majority of ag stocks, then exchange-traded funds (ETFs) might just be what you are looking for. Agriculture ETFs can either be a collection of ag stocks that would cost you a princely sum to assemble on your own, or they can be a collection of futures contracts that are commodity specific. Both types allow for broader investment and, theoretically, lower the risks by spreading your investment. The futures-focused funds also take away the risk of having to take delivery personally, preventing the aforementioned cotton storage issue.

Although futures, stocks and ETFs are the main entry point into the agriculture sector for most investors, there are alternatives that are either more speculative or more capital intensive (or both). These include exchange-traded notes, investing in farmland directly or through REITs, entering share cropping partnerships with producers and so on. Of these investments, the farmland REITs may be the most attractive. These REITs buy up tracts of farmable land and rent or hold it. The value of farmland has seen some significant increases in value over time and is often seen as a hedge against inflation. These REITs are relatively new, however, and investors have been burned many times by believing land or real estate is always going to appreciate.

The agriculture sector is more investor-friendly than most people expect and has been an investment destination for hundreds of years. The futures market grew up within agriculture, and many ag stocks can trace their history back to a time when shooting at each other with pistols was an acceptable way to settle an argument. The maturity of the ag sector and the diverse means of investing in it, combined with new concerns over worldwide food consumption, make it a compelling option for many investors.