How To Invest In Farming Without Owning a Farm

A Primer For Investing In Agriculture

By Andrew Beattie

 

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

What Is Agriculture?
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 makes an agribusiness, but if a company is pulling half of its revenue directly or indirectly from agriculture, then it is an agribusiness. To see how this can get confusing, consider a company like the Potash Corporation of Saskatchewan (POT). POT is basically a mining company, pulling stuff out of the ground and selling it. The stuff it pulls out, however, is fertilizer, so the big buyers are farmers; therefore, POT is an agribusiness despite the fact that it looks suspiciously like a mining company.

The same is true for manufacturers like Deere & Company (tractors) and other companies that, at first glance, 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.

SEE: Natural Resource Investing

Seeding Your Portfolio with Ag Investments
Agriculture is arguably the oldest industry in the world, so it is not a big surprise that there are a number of different ways to approach investing in it.

Futures
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: Intro To Open Interest In The Futures Market

Stocks
The overall trend in agricultural production for the last 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. There are also companies like Dole that grow and distribute their products. You can pick among agricultural chemicals companies like Agrium, Monsato and Potash, equipment manufacturers like Deere and Kubota or even processors and distributors like Tyson Foods Inc and Dole Food Company Inc.



 

Source: http://www.investopedia.com/articles/basics/12/agriculture-primer.asp