“Over the next few years, I think agricultural projects are going to be one of the best investments and agriculture is going to be one of the best industries in the world.”
– Jim Rogers (2010)
Investing in agrobusiness the agriculture value chain can be economically viable, but only if you are well informed and ready to invest two resources: Time and Money.
Money is often regarded as the most important resource. However, it is a proven fact that money lost can be regained but time lost is gone forever. Time is a limited resource and should be treated as an investment.
Time, conducting research, attending seminars and monitoring your agro business can be as important to the success of that business investment as much as the money you put in.
If you have ever wanted to invest in agriculture but felt you didn’t know enough to start, below are some tips that can help:
1. Certain factors can make or mar your investment
Some factors you should consider before committing to an agriculture business include:
– Farm cycle: Farm cycles vary depending on crops. There are annual, biennial and perennial crops. Investment in a perennial crop means that your capital is tied for a minimum of three years but could lead to a huge payday. If you are not willing to tie your capital for that long or you are risk-averse, you may tilt in the direction of annual crops.
– Economic growth: As a component of Aggregate Demand, the rise or fall in demand directly influences inducement to invest.
– Risk: The higher the probability of incurring losses related to the expected return on investment, the less likely an investment is to be made. The risk/reward ratio can be used to asses profit potential against loss to guide investment decision.
– Consumer demand: The law of demand and supply is an important factor to decide on an investment. Low supply and high demand is the best market to venture into.
– Government policies: Government policies have direct and indirect influences on businesses. Getting familiar with agriculture and business policies can help you save millions and a few headaches.
– Inflation: The general increase in prices without a corresponding increase in the purchasing power of money corrodes the value of investment returns. It is important to study past and present market trends in other to best prepare yourself for any sudden change in the economy.
– Environmental factors: Flood, draught, harmattan, heavy rainfall, excessive sunlight, can affect crop cultivation. The environmental situation of farmland should be researched on before purchase.
– Finance: Capital required to start a poultry farm differs from that required to invest in farm machinery. Low capital on high capital investment could lead to mediocre outcomes.
– Skill sets: Some investments require certain skill sets over others. Poultry farming and cattle rearing require a certain level of technical know-how so it’s either you have that knowledge or you hire technical field specialists.
If neglected, these factors can negatively affect the production and distribution of agricultural material, thus damaging alpha in investment. These factors also help determine which area is most suitable for investment.
2. Invest across the agriculture value chain
Agricultural business is broad and covers everything from crop cultivation to animal rearing, wool production for clothes, and materials for housing. Leather goods like bags, shoes, football, basketballs, volleyball and hand gloves are made from cow hides, so there are many areas you can invest in.
Therefore, there are various ways investment can be made and some of them are through:
– Farmland: Land appreciation makes farmland one of the best areas for investment. Its constant decrease due to house and factory projects makes available land much more valuable. This appreciating factor serves as a benefit to investors.
If you want to invest in arable farmland, you can purchase tracts of farmland acreage and work with local farmers to farm the land.
– Agricultural stocks: Investments can be both tangible (farmland, animal cultivation, etc) or intangible (stocks). You can invest in the stock of farming supplies and equipment companies by purchasing shares.
– Exchange Traded Funds: Much like stocks, Exchange Traded Funds are investment funds traded on stock exchanges. Considered less volatile than individual stocks, and cheaper than most minimal stocks, ETFs track stock index, commodities, bonds, or a basket of assets.
In an agro-business, ETFs can group assets such as futures contracts for different crops or contracts for one crop from different growers. Profits can be made from buying and selling ETF shares.
– Futures: Futures are financial contracts which obligate the buyer to purchase an asset or the seller to sell an asset at a predetermined future date and price. Futures offer investors an easy way to play price changes for agricultural products without actually owning the underlying asset.
Futures can be bought in soy, cocoa, coffee, corn, cotton, and other agricultural products. The contracts for futures can be difficult to understand and thus, this option is best recommended to experienced investors or those familiar with agricultural cycles.
– Biotechnology: Technology is at the forefront of all sectors and agriculture is not left behind. With the high demand for food, farmers are seeking ways to improve farm practices and crop production.
The application of biology to agriculture could allow for the breeding of plants with strong resistance to pests, crops with improved characteristics, improved post-harvest processing, as well as environmental pollution mitigation. Investors can buy stocks in biotech startups.
Although investment in biotech could be extremely risky, it offers the potential for massive gains if successful.
– Crowdfunding: The internet has increased the popularity of crowdfunding even in the agricultural sector and has made agro-business investment a low hanging fruit for the savvy investor. Agro crowdfunding platforms such as Farmcrowdy allows for investors to invest in farm units, monitor progress, and get an ROI after a farm cycle is completed.
3. Set up an automatic deduction system
A 2001 survey by MIT showed that people are willing to pay more for a purchase if they can use their cards instead of cash.
Another study in 2012 showed that when people pay with cash, they tend to focus more on the price against the benefits of what they want to purchase.
Unless you are deliberate, it can be difficult to invest. This is why automatic deduction systems are more practical if you want to start or continue to invest your funds.
4. Take advantage of agriculture technology
Technology has become an essential part of the 21st century. Almost every fast-growing sector uses technology in its operations and Agric tech is not left behind.
Startups such as farmcrowdy have made it easier to connect farmers with sponsors, sites such as farms.com have made it easier for farmers to purchase farming equipment at cheaper prices, and weather apps such as farmlogs, farm at hand, and agrible can be used to predict weather conditions and avert disaster.
5. Keep records
Business records can be kept manually, on the internet or computerized on platforms such as spreadsheets. Records make it easier to store and retrieve the information needed to prepare financial statements.
When it comes to any sort of business endeavor, a gentleman’s handshake is not usually enough. Record keeping serves as a legal way of establishing a business transaction between parties.
Personal motivation can also be boosted by keeping records and monitoring progress. It helps ascertain if an investment is profitable, needs improvement, or if it’s time to pull the plug.
6. Utilize agro marketing to the fullest
Technology has also improved agro marketing. The importance of agro marketing in agriculture is one that is often overlooked.
“The key to business success is developing a marketing plan from the very beginning. Budgeting for a marketing plan should be factored into the operating costs of any business set up.”
– Lisa Airey, Strategy Analyst at Old Mutual Unit Trusts.
A marketing plan will help you recognize the best marketing channels and the most effective strategies for your agro-business.
The advent of the internet has improved the planning and distribution of agricultural produce in such a way to satisfy the farmer, producer, and consumer.
Internet marketing not only makes it easier to reach a wide market (with no location limitations), it also creates convenience for the consumers. Websites can be created to make it easier for customers to obtain necessary information and E-commerce services can be adapted for customers who want to place orders.
The internet also makes it easier to personalize offers by using customer analytics to determine what offer is best suitable.
7. Investment is not a get rich quick scheme
Overnight millionaires are not a fairy tale but the chances of hitting the jackpot are rather slim. You must remember that investing is often a long-term process which requires patience and commitment to obtain financial gain.
The common purpose of investment is usually to build wealth. However, having a secondary purpose makes it easier to keep investments going even when rough patches are hit. Since agribusiness is not a get rich quick scheme, it is important to find a secondary reason for investment which will serve as a good inducement to invest.
There are many people who will argue that investing in agriculture is more than turning a profit. Infact, many investors see it as their contribution to man’s fundamental need for food, clothing, and shelter.
For American businessman and agricultural investor Jim Rogers, the reason for his investment is in the future. “There will be an imbalance in the future between demand and supply in agricultural commodities…and that will drive prices higher.”
This means that when according to his predictions, the demand for agricultural products surpasses the supply and prices of agro products are hiked, the investments will yield.
It is important to set short term, long term, financial and personal fulfillment goals for your investment so that you can remember why you invested in the first place. The tips above are just a guide, it is important to seek professional advice before you make any business commitment. If you cannot afford the services of a professional you might want to run your idea by family, friends or connect with agro professionals on Linkedin to pick their brain. A fresh perspective could point out issues or provide suggestions you had previously missed.
“Agriculture is our wisest pursuit because it will, in the end, contribute most to real wealth, good morals, and happiness.” – Thomas Jefferson
DISCLAIMER: This post is not meant to be replaced with professional investment advice. These investment options are NOT recommendations in any way. All investments come with significant risk and should not be made without proper due diligence. Make sure to consult your attorney and investment advisers before acting on any of this information.