Investing in agriculture: some practical guidelines for non-ag investors
Copyright 2012 - Dr. Manuel Madrid
Investing in agriculture is becoming increasingly interesting for investment funds, considering the uncertainty and volatility found in many financial instruments.
Agriculture in general, with some exceptions, has not been a good investment for several decades. Continuously falling prices of commodities, coupled with increasing input cost (agricultural fuel, fertilizer, seed, pesticides..), weather volatility, water costs and restrictions in water availability, limited field labor availability have made agriculture a risky and difficult investment, with a high probability of financial losses.
This is reflected in two real factors: farmer age and land abandonment. Average farmer age in many developed countries is above 60 years, in some above 65. There is not a new farmer generation to replace them.
Many agricultural lands are being abandoned in developed countries as commodity prices do not cover costs.
This tendency for lower food prices and land prices for the last 30 years is expected to reverse soon and will cause eventually a shortage of agricultural commodities. The main reason is the increasing world population (especially in Asia) and the competition for resources. The agriculture of the future will have to produce with:
- less water
- less land (due to competition with urban or protected natural value)
- less fertilizer (due to oil price increases)
- less petroleum-based plastics (for the same reason)
- less chemicals available (due to minimum residue regulation - minimum waste) and
- less labor
With depressed land prices in many parts of the world and increasing financial uncertainty, buying agricultural investments seems a good option for diversification and stability reasons.
There are, however, some key aspects that investors need to consider when buying agricultural assets, especially if they are not familiar with agricultural investments or production
- Choosing the land:Not all land plots are the same, differences in productivity can vary from 1-2 tons/ha to 8-10 tons/ ha in grain producing land. A good soil profile analysis is needed before committing any farm price. This includes an analysis of soil structure, soil fertility, drainage, water availability and the existence of pollutants or persistant pesticides in the soil.
- Choosing the crop: Choosing the crop is crucial for success. First it will be the decision whether to produce a perishable or non perishable crop. Fruits and vegetables are more productive on a per hectare basis, but require additional infrastructure, in the form of warehouses and cooling facilities
- Irrigated vs non-irrigated land: Non-irrigated land is less costly and requires less infrastructure, but is very dependant on the weather, in particular rain, and rain can mean the difference between making a profit or a loss. Irrigated land is more costly and requires water availability. Infrastructure ( pumps, pipelines...) has to be maintained and water has to be paid for. But its output is more constant and secure
- Logistics: proximity to large cities or ports is crucial for the success of the operation. With fuel costs increasing every year, the proximity to the marketplace itself by road, or by sea via ports can make the difference between a profit or loss-making operation
- Labor and management availability: Apart from buying the assets, an agricultural investment requires human resources. That means field resources ( field workers, drivers, pickers, supervisors) and managers. Attracting field workers and managers to the land is not easy, hours are long and often on holidays and weekends. There are not many students in agricultural schools in the last years. Competition for human resources in the agricultural sector will increase in the future
- Producing vs processing: processing foods has often been a more stable and profitable business than production. For one thing, it does not depend on the weather, or other field risks like pests or diseases. The input commodities will be bought and a margin added by the processing involved. It also non-perishable, processed goods can be stored for many months and sometimes years. Processing means canning, drying or freezing or other form of preparation: puree, jelly, juice, etc
- Food safety and traceability: Food safety is a key prerequisite for successful operation of any food or agriculture business. Vertical integration through acquisitions is often the key to ensure traceability and integrity of the chain.
There are many other factors to be considered when planning to invest in agriculture. Our recommendation for investors without agricultural experience is to team up with an agricultural investment expert, who, together with a financial analyst, can make a good assessment of possible acquisition targets, their valuation and avoid costly mistakes.
Fruitprofits is an agribusiness consulting company advising clients in technology, markets and investments. For further questions contact: firstname.lastname@example.org