Farmland and agriculture may help diversify any investment portfolio and level out risk by generating profits that aren't always connected to other markets.
Any investment in agricultural land or a firm that helps the agribusiness industry is considered an agricultural investment. Farmland, arable land, crop land, and cultivated land are all terms used to describe agricultural land.
Investors regard agriculture and farming investments as recession proof. This is because people will eat if there is recession or boom in the economy.
Further, the need for farmland rises as there is a limited supply of farmland. The notion that the world population has quadrupled in the last century, and the need for food is expected to increase, is a major factor influencing the continuing and rising demand for agricultural land.
Subsequently, agriculture can provide several opportunities for real estate investors, seeing the necessity of food production at the global level and the past performance.
Ways to invest in farming or agriculture
There are many ways to invest in agriculture, which provide opportunities for active or passive participation.
Buying farmland directly
Owning a farmland directly can be fruitful, producing high returns but requires a very high investment/mortgage to pay overtime.
Many landowners do not cultivate their property. Farmers can rent land from landowners in order to farm it. Typically, these lease arrangements span several years, and the farmer rents the land for a higher price than the mortgage payment.
This in turn is advantageous for both landowners, as they can pay their mortgage and build equity in property without farming themselves, and farmers, as they can produce income by farming without worrying about the money needed to buy the land.
Investors can invest in a farming-focussed real estate investment trust (REIT), which typically buy farmland and then gives it to farmers on lease.
Farmland REITs provide a lot of advantages. For one thing, they offer considerably greater diversity than purchasing a single farm, as they let an investor to own stakes in many farms spread across a large geographical area.
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They also offer higher liquidity than owning physical farmland as REIT shares can be sold quickly on stock exchanges.
Buying agriculture Stocks
Investors also have an option of investing in equity in publicly traded firms in the farming sector. These firms range from firms that plant, grow, and harvest crops to those industries that support farming. Fertiliser and seed wholesalers, agricultural equipment manufacturers, crop distributors and processors are three of the major industries.
Agricultural ETFs, Mutual funds and commodities
Investors who are looking for diversified exposure to agriculture sector and are unsure on stocks that will yield high returns, buying ETFs and mutual funds can be good tools for them. However, an investor must note the management fee and the index performance that the fund tracks.
An investor can also get exposure to commodities by buying futures contract. There are also many ETFs and exchange traded notes to give more varied access to commodities.
Investment in farm debt
Farm lending can also be explored by investors, especially those who would not invest in equity in farms or related markets.
As farming is a capital-intensive industry, farmers regularly borrow money. Planting may necessitate short-term borrowing. Additionally, they may be able to obtain long-term loans to help finance equipment purchases.
An investor can get consistent payments when a borrower repays loans if they buy farm debt directly or through bonds. He can also overcome the inconsistency of agricultural revenue cash flow.
How is farming in New Zealand?
The agricultural industry of New Zealand is the key economic powerhouse of the country. The industry contributes substantially to the NZ economy with GDP contribution in billions.
Sheep and cattle ranching is the most frequent kind of farming but horticulture is also popular.
For most Kiwis, owning a farm is out of bounds financially.
Which are the popular 5 NZX agri stocks?
Let’s have a look at some of the popular agri stocks listed on NZX.
- Allied Farmers Limited (NZX:ALF), a rural firm offering livestock trading, merchandising, real estate services, and other related services.
- New Zealand Rural Land Company Limited (NZX:NZL), developed to acquire rural land across the NZ agricultural sector.
- Scales Corporation Limited (NZX:SCL), an essential services provider to the primary sector of NZ.
- PGG Wrightson Limited (NZX:PGW), a NZ-based leading provider to the agri sector to growers, processor and farmers.
- Livestock Improvement Corporation Limited (NZX:LIC), an agri-tech co-operative that provides genetics and technological expertise in the dairy sector.
Pros and cons of investing in agriculture
Agriculture is an industry that an investor can lay his money on for a longer term as people need to eat for their survival and the population globally is growing. Further, farms can generate higher yields with less land and other resources.
Some of the risk factors involved in investing in farming is the weather and climate conditions. If the conditions are not right like heavy rainfall, drought, etc., crop yields can be affected. Secondly, trade wars can pose significant uncertainty for the sector.