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Investing in agriculture – good for growing returns?

In the final part of our three-part series on alternative investing, we take a closer look at agriculture, how it’s performed, the opportunities for investors and share 2 investment ideas.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

As one of the oldest standing trades, agriculture plays a crucial role in an economy. Its products are in everything we own, from the food we eat to the fabric in our clothes. It’s also an important source of livelihood.

The industry, like many others, has been under strain due to the pandemic. Travel restrictions hindered supply chains and disrupted food production. But even before the pandemic, the industry was under pressure.

As the global population increases, food insecurity increases too. Over 800 million people around the world don’t have enough food to eat currently and the population is expected to increase by almost 2 billion by 2050. Other factors like weather uncertainty, government regulation, rising costs and a shortage of available land, are challenges to the industry as well.

Despite this, some of the different sub-sectors within agriculture helped address some of the issues during the pandemic and have started to see more attention from governments. We’ve also seen positive steps towards the long-term view of agriculture, particularly around how sustainable the industry is.

Demand is growing, but the sector’s still off the radar for some investors. It can be difficult to invest directly in things like farms, land or machinery, and it can be hard to understand or value. But there are ways to do so and it could offer some interesting opportunities.

It’s a specialist area though and comes with more risk. For investors considering this sector, we think it should only form a small part of a diversified portfolio.

This isn’t personal advice. If you’re not sure what’s right for your circumstances, ask for financial advice. Remember all investments and any income they produce can fall as well as rise in value so you could get back less than you invest.

What are the opportunities for investors?

One of the greatest challenges for the industry is being able to do more with less. We need to feed a growing population with less available land, while reducing the impact on the environment.

Innovation in agricultural technology is likely to form part of the solution. ‘Precision Ag’ is currently being used to help boost crop yields, reduce water use and increase farmer profits. It combines historical data with satellite imagery to identify the best areas or time to plant and harvest.

Seed technologies are also developing which will improve the quality and yield potential of crops. More streamlined herbicides are being used alongside this to pinpoint crops that need spraying, rather than the whole field. The aim is to increase food production and reduce emissions.

Another potential area of opportunity lies in sustainable protein farming. We’ve seen a reduction in arable land, so sustainable aquaculture, including salmon farming, is being used as a potential alternative. This could help meet the increased demand for protein, while keeping carbon footprints low and reducing reliance on land.

Investments in certain feed additives is another way to increase sustainability. It can help reduce things like methane emission in cows, limit the amount of feed needed and increase animal health and welfare.

Sustainable arable and protein solutions, combined with advancements in technology, could offer some interesting opportunities for investors. But there’s a lack of infrastructure currently and these solutions require large amounts of clean power. The transition is likely to be costly and won’t take place overnight. So a long-term view is needed.

How’s agriculture performed?

The agriculture sector has performed well over the long term. People will always need to eat, so the sector has tended to hold up well in periods of uncertainty. There have been times though where it lagged the global stock market. Although this isn’t an indication of how it’ll perform in the future.

Agriculture is exposed to slightly different risks. Weather is a big risk to crops and if a crop yield is poor, this can impact global supply. Last year Brazil had a strong harvest following prime weather conditions, whereas parts of Europe struggled with unusually hot and dry periods.

Throughout the pandemic, we’ve also seen issues around supply chains and how heavily they can be disrupted. Climate change can also have a large impact on the sector as well.

This is why it’s best to take a long-term view with investments and a specialist sector like agriculture should only form a small part of a well-diversified portfolio.

There are several different sub-sectors within agriculture, and performance has been mixed. The food sector took a hit. Travel restrictions hampered the ability to transport food and supply constraints led to reduced food production. Growing awareness around healthier and alternative foods to things like meat also had an impact. As restrictions ease and demand increases, this sector is expected to recover.

Fertilisers and agricultural chemicals had a strong year. These products can be used to enhance yields and help protect crops. With the current supply constraints and worries around food production, the sector saw increased demand.

Certain products that can be grown or raised, also known as soft commodities, have done well too. Corn and soybean prices rose to new highs following a surge in demand from China. But rising soft commodity prices has put pressure on other sectors like meat, fish and dairy.

Investment ideas

Investing in a farm, machinery or other parts of the agricultural industry can be difficult for investors. They can require big upfront investments or lengthy leases. But there are options.

Some real estate investment trusts (REITs) include farmland companies or agricultural machinery. They can offer more liquidity rather than owning a physical farm – meaning it’s easier to take your money out when you want.

Open-ended funds are also an option, as they can invest in agricultural-related companies or types of agriculture commodities, including wheat, coffee beans or livestock.

Investing in agriculture isn’t right for everyone though. You should only consider an investment if it meets your investment objectives, or fulfils a specific need for the type of investment being made.

Let’s look at some examples.

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Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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