We don’t support this browser anymore.
This means our website may not look and work as you would expect. Read more about browsers and how to update them here.

Skip to main content
  • Register
  • Help
  • Contact us

Investing in agriculture – good for growing returns?

We take a closer look at agriculture, how it’s performed, the opportunities for investors and share two 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 currently have enough food to eat 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.

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 for the long term, 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 they 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 potential solutions to ease industry pressures?

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 find 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 lower 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 improve 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.

But more recently, all eyes have been fixed on the horrific events occurring in Ukraine.

The Ukraine crisis and the impact on agricultural commodities

The tragic situation in Ukraine continues to change daily. There are rapid developments on humanitarian, military, political and economic levels. The crisis is first and foremost being felt by the people of Ukraine. And for all of us, our overriding concern is for those directly or indirectly caught up in the invasion.

We’ve been privy to a lot of information recently around how the conflict has significantly impacted certain commodities like oil & gas. It’s pushed prices to heights not seen since the great financial crisis in 2008. But there’s been less talk around the impact it’s had on food and agriculture.

Ukraine is home to ‘chernozem’, which is highly fertile black soil, rich in organic matter, that helps bolster the country’s production of key crops. Ukraine is arguably the number one country in terms of arable land, which is one of the reasons it’s referred to as the ‘breadbasket’ of Europe. It’s the number one exporter of sunflower oil, the second largest producer of barley (fourth in exports) and the fourth largest producer of potatoes.

Ukraine and Russia are global powerhouses when it comes to agricultural commodities. Collectively they make up over a quarter of global wheat exports, 80% of sunflower seed exports and over 40% for barley. The conflict could have serious ramifications for food security, which is already under pressure from climate change and the lingering effects of the pandemic.

President Putin’s military invasion of Ukraine has triggered a flood of sanctions from western countries too. They’re designed to cripple the Russian economy and cut it out of the global financial system. Although food products are excluded from most of the financial sanctions, there’s been an abundance of supply chain and logistical disruption.

Ports and airspaces are being closed in Russia and many supply ships are unable to sign new deals or gain insurance through fear of conflict or trade embargos. Several key Ukrainian ports have closed too, including some major trading hubs in the Black Sea.

How has agriculture performed?

Clearly the disruption to production and exports will impact consumers in terms of both availability and rising prices of commodities. We’ve already witnessed wheat prices hit nine-year highs. Other commodities like maize, corn, soybeans, and palm oil all surged in value.

There are also concerns that the Russian invasion will worsen existing food shortages, pushing prices higher. Adverse weather conditions in South America and labour shortages in parts of Asia are already limiting supplies. So disruption in both production and distribution could further shift the balance between supply and demand.

Other producers around the world will most likely be called upon to look for ways to ramp up production to bridge the drop in supply. But this isn’t likely to happen quickly. Suppliers in these regions cannot increase output instantly and won’t be able to fully replace the high yield crops from the Black Sea region.

Fertilisers and agricultural chemicals have been hit too. These products can be used to enhance yields and protect crops. Russia is a large exporter of these products, so disruptions could limit how much is available. This could force prices higher, meaning some farmers are unable to obtain or use as much as they need. The end result in more extreme cases could see yields fall by 50%.

Continued conflict will add pressure to an already struggling industry, which is still recovering from the effects of the pandemic and the imposing impact of climate change. Couple this with rapidly rising inflationary pressures and food prices are set to soar.

That said, things are changing daily. After initial surges, western sanctions and delayed decisions from NATO in some cases have caused agricultural commodity prices to drop significantly. There are decades where nothing happens, and there are weeks where decades happen. This seems an appropriate phrase in today’s climate. Ups and downs are to be expected and investors need to take a long-term view.

We’re all hoping for a peaceful resolution soon and our thoughts are with all of those caught up in the invasion.

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 than owning a physical farm – meaning it’s easier to take your money out when you want to.

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, and fulfils a specific need for the type of investment being made.

Let’s look at some examples.


Fund insight: our weekly email

Sign up to receive our expert fund research and insights.

Please correct the following errors before you continue:

    Existing client? Please log in to your account to automatically fill in the details below.

    This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.

    Loading

    Your postcode ends:

    Not your postcode? Enter your full address.

    Loading

    Hargreaves Lansdown PLC group companies will usually send you further information by post and/or email about our products and services. If you would prefer not to receive this, please do let us know. We will not sell or trade your personal data.

    Our fund research is for investors who understand the risks of investing and that investing in funds isn't right for everyone. Investors should only invest if the fund's objectives are aligned with their own, and there's a specific need for the type of investment being made. Investors should understand the specific risks of a fund before they invest, and make sure any new investment forms part of a diversified portfolio.

    What did you think of this article?

    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.

    Editor's choice – our weekly email

    Sign up to receive the week's top investment stories from Hargreaves Lansdown. Including:

    • Latest comment on economies and markets
    • Expert investment research
    • Financial planning tips
    Sign up

    Related articles

    Category: Funds

    Growth vs value – which is best?

    We take a look at the difference between growth and value investing, and share our view on what investors should consider.

    Kate Marshall

    03 Aug 2022 5 min read

    Category: Funds

    3 tips for trading ETFs

    We take a look at how ETFs work and share three tips for investing in them.

    Alexander Watkins

    01 Aug 2022 4 min read

    Category: Funds

    UK stock market and funds sector review – politics dominates the headlines

    We look at what’s happened in the UK economy, how the stock market’s been coping, and how our Wealth Shortlist funds have fared.

    Dominic Rowles

    29 Jul 2022 9 min read

    Category: Essentials

    Spotting investment and cryptocurrency scams – how to stay safe

    The latest on how to spot and protect yourself from investment and cryptocurrency scams, and what to do if you’ve been scammed.

    C J Hill

    28 Jul 2022 3 min read