If you’ve been thinking about putting some of your money into farming, congratulations – you’re the type of person who thinks outside the box and sees the value of not only diversification but also buying into a growing (no pun intended) long-term alternative asset.
You’ve probably already been reading about all the opportunities for profiting from the agriculture sector. You have no doubt come across many different ways of participating – buying land, leasing, sharing ownership and maybe a few other variations.
When most people think about farming, the first thing that comes to mind is the traditional model where the farmer owns or leases the land, plants the crops and sells the harvest. For average folks who are just looking to profit from this alternative investment sector, that’s not really an option.
So, how do you decide which opportunities make sense for you and what that looks like? Do I invest in growing cacao in Ghana? How about fique or coffee in Columbia? Shrimp farming in Viet Nam? Coconuts in Brazil? Or how about pineapples in Australia?
You’ll certainly want to complete your due diligence with regard to the crop, but beyond what you are growing there are multiple business structures from which to choose. Let’s take a look at the most prominent options.
Buy the Land and Farm It Yourself
As noted above, this is rarely a good option if you don’t have an extensive farming background. In most cases, this requires being a full-time, hands-on farmer and learning the business from top to bottom.
What crop do you grow? What’s the annual cost of crop insurance? How much will your equipment cost? What are your up-front costs? Do you have full legal access to adequate water? What’s the cost of maintaining an irrigation system? Do you hire out the harvest process? What are your annual maintenance costs? Who will buy your crop — do you try to sell it yourself or use a wholesaler? Will you need to process and package your crop in order to sell it?
My hat’s off to all full-time dirt farmers; that’s a tough profession and it’s not for the faint of heart!
Short-term Investment
Some agricultural companies are looking for capital, not partners. They’re farmers and have a great idea, have done their research, maybe hired experts and even begun the build-out of their concept. To bring their project to fruition, they need cash; basically, a loan to the company secured by the concept, future harvests and any assets they may have.
This type of opportunity allows you to make a (relatively) short-term investment with a full return of your cash plus a prescribed portion of the profits within a set time, typically 2-10 years. The idea is that this cash infusion will give the company time to get up and running (or expand), have enough liquidity to meet unforeseen needs and then be able to stand on their own once their product begins hitting the market.
These are often available only to accredited investors and while they involve agriculture and you participate in the hoped-for returns, you’re not really in the game.
Buy a Share of the Operation
Like the options that follow, this is a turn-key business. You don’t have any hands-on responsibilities and professional farmers take care of everything. No figuring out budgets, watching the weather or losing sleep every night over the myriad details involved in day-to-day farming.
I sometimes refer to this as syndication… it’s sort of like how many racehorses are owned. Multiple people will collectively own a horse and then share the proceeds of the purse or stud fees after expenses.
You own a percentage or share of the overall operation. For example, a 100-acre cabbage farm might be divvied up into 400 shares of a quarter-acre each. You pay a set fee for your portion of the farm; the management company takes care of the details and you collect your portion of the net proceeds.
Some of these schemes involve a separate annual payment for expenses above and beyond what was expected. You don’t own the land directly, the company does and you own part of the company; you just participate in the profits and losses if there are any. This type of structure may or may not be vertically integrated.
Buy the Land, Have an Expert do the Farming
This is the way most of the companies I represent structure their offerings. When you buy, you have two contracts; one for the land purchase and one for the farm management agreement. You get a deed for the land and are sometimes responsible for paying annual property taxes, which are typically nominal. For example, I pay about $50 in taxes per year for two hectares of land I own in Panama.
Most companies are vertically integrated, which means that once the land is acquired, they take care of development, installation of the irrigation system, growing the seedlings, planting your field, ongoing maintenance and crop care, harvesting, processing, packaging and selling your crop.
This last point is important. When you buy your land, you already have a buyer… the management company; they are either selling directly through their own channels or act as the intermediary with a wholesaler.
Lease the Land, Have an Expert do the Farming
A big attraction to leasing is that you don’t need to worry about getting land titles, which can oftentimes involve a very lengthy process. In North America, you might get your deed within a matter of weeks of closing on the property, but elsewhere in the world, it can be a long, bureaucratic process that sometimes takes years.
In Panama, for instance, it is not unheard of for the process to take three years or even more. It is a ten-step process involving four government agencies! Even though you technically own the land once the sale is completed, it can be unnerving to wait such a long time to get that piece of paper in your hand.
Another plus for some lease programs is a lower entry point since you aren’t buying the land. Depending on the offer, you may own some of the non-land assets that have a limited life such as the irrigation system or maybe even the trees. Some lease arrangements require a modest up-front payment, much like a long-term rental agreement, and then your ongoing costs are deducted from your annual harvest payment.
Once the lease is up you can either walk away with your accumulated gains or sign another lease. Either way, you have profited from being in agriculture.
The Bottom Line
Every agriculture opportunity is different and there are many variations of each of these concepts.
How you participate in the boom in agriculture offerings will depend on your own financial situation, what your goals are and your risk tolerance.
If you’re planning for retirement, you may want to place your funds in a long-term option that will provide returns not only for the rest of your life but also for your heirs. Both leasing and buying the land meet that goal.
