Glossary
I have created this glossary because you may come across unfamiliar terms, the names of organizations or other references that are used when buying agricultural investments. If you come across a term that isn’t included here, please let me know so I can update this page.
The list is in alphabetical order and will include links to source material where possible.
Accredited Investor – An accredited investor is an individual or a business entity that is allowed to trade securities that may not be registered with financial authorities. They are entitled to this privileged access by satisfying at least one requirement regarding their income, net worth, asset size, governance status, or professional experience. Accredited investors also have privileged access to private placement shares, venture capital, hedge funds, angel investments, and deals involving complex and higher-risk investments and instruments.
In most cases, an accredited investor is a person who has an annual income exceeding $200,000 ($300,000 for joint income) for the last two years with the expectation of earning the same or a higher income in the current year. They may also be considered as an accredited investor if they have a net worth exceeding $1 million, either individually or jointly with their spouse. That is a fairly simple definition of the requirements as it applies to individuals; you can read more in this Investopedia article.
The Securities and Exchange Commission (SEC) considers Accredited Investors as those who are financially sophisticated and have a reduced need for the protection provided by regulatory disclosure filings. I personally find this repulsive; government telling me that I’m too stupid to make an investment because my net worth or income doesn’t meet an arbitrary standard.
Alternative Investment – You won’t find the definition on the pages of the Securities and Exchange Commission website; it’s not a term that has specific legal weight. Most sources describe alternative investments by excluding what it doesn’t mean in contrast with traditional investments. For instance, Wikipedia says, “An alternative investment (also called an alternative asset) is an investment in any asset class excluding stocks, bonds, and cash.”
This relatively loose definition includes farmland along with tangible assets such as precious metals, collectibles, real estate, commodities, private equity, hedge funds, financial derivatives and cryptocurrencies. Investments in real estate, forestry and shipping are also often termed “alternative” despite the ancient use of such real assets to enhance and preserve wealth.
The Chartered Alternative Investment Analyst Association includes four categories: 1) Real assets (including natural resources, commodities, real estate, infrastructure, and intellectual property), 2) Hedge funds (including managed futures), 3) Private equity and private credit, and 4) Structured products (including credit derivatives).
Compound Annual Growth Rate (CAGR) – The simplest explanation of CAGR is that it is the rate of return that would be required for an investment to grow from its beginning balance to its ending balance. CAGR is a useful tool for evaluating the returns for any investment that can rise or fall in value over time; it provides a single number that quantifies the performance over the lifespan or a specific period of the investment. Since any agricultural investment includes both the value of the asset and the harvest proceeds, this allows an apples-to-apples comparison of potential investments.
Force Majeure – The French term literally means “superior force” and is a common clause in contracts that essentially frees both parties from liability or obligation when an extraordinary event or circumstance beyond the control of the parties, such as a war, strike, riot, crime, epidemic or sudden legal changes prevents one or both parties from fulfilling their obligations under the contract. Because of the nature of agricultural production, you will find such a clause in every contract for managed farmland ownership.
Global G.A.P. – The “G.A.P.” in Global G.A.P. stands for Good Agriculture Practice. Global G.A.P. is a private organization that establishes an integrated program of food production standards, covering both agriculture and aquaculture. Those Good Agricultural Practices are an internationally accepted set of farm standards that are recognized in more than 100 countries. Global G.A.P. certification inspections are conducted by independent certification companies.
Hectare – A hectare is the metric measurement of land equal to a square with 100-meter sides. For ease of conversion, one hectare is equal to 2.47 acres and one acre is equal to roughly 0.40 hectares. For other conversions such as weights and distances, you can use calculateme.
Internal Rate of Return (IRR) – The Internal Rate of Return is a metric used in financial analysis to estimate the profitability of potential investments. The Corporate Finance Institute IRR calculation is the expected compound annual rate of return for a project or investment, determines the efficiency of a project in generating profits and allows you to compare opportunities that have different cash flow timing. The IRR is generally given for the period of the investment or for a set number of years based on, for instance, how long a tree is productive or how long before a greenhouse requires refurbishing.
Investment – The Merriam Webster definition is “the outlay of money usually for income or profit.” It can also mean the sum invested or the property purchased. An investment is an asset acquired with the goal of generating income. The Chartered Alternative Investment Analyst Association suggests that any net outlay of cash made with the prospect of receiving future benefits might qualify as an investment. For the purposes of this website “investment” means the purchase of managed farmland. I am not referencing Wall Street products or others regulated by the U.S. government.
Nave – The term originally meant the main part of the interior of a church. Because greenhouses typically have an arch (like a church) it has come to mean a row or section of a greenhouse.
Organic – Many people think the term organic simply means natural. While that is an easy way to describe it, the term organic has specific legal and regulatory meanings. According to the U.S. Department of Agriculture (USDA), organic is a labeling term that indicates that the food or other agricultural product has been produced through approved methods. These methods integrate cultural, biological, and mechanical practices that foster cycling of resources, promote ecological balance, and conserve biodiversity. Synthetic fertilizers, irradiation, and genetic engineering may not be used.
Much like Global G.A.P. certifications, there are multiple international agencies that provide organic certification. Contrary to popular belief, the U.S. Food and Drug Administration (FDA) does not regulate the term “organic” on food labels; that is the job of the USDA National Organic Program. The British Department for Agriculture and Rural Affairs (DEFRA) says that:
“Organic food is the product of a farming system which avoids the use of man-made fertilisers, pesticides; growth regulators and livestock feed additives. Irradiation and the use of genetically modified organisms (GMOs) or products produced from or by GMOs are generally prohibited by organic legislation. Organic agriculture is a systems approach to production that is working towards environmentally, socially and economically sustainable production. Instead, the agricultural systems rely on crop rotation, animal and plant manures, some hand weeding and biological pest control.”
Passive Income – Passive income is derived from an enterprise in which a person is not actively involved. In other words, it is not earned income from a job or other activity requiring your direct participation. When you purchase your farmland or greenhouse and someone else manages it for you; you are a passive party in the process. Like portfolio income, your money is doing the work. In Publication 925, Passive Activity and At-Risk Rules, the Internal Revenue Service defines passive income as “income from a business in which the taxpayer does not materially participate.” Passive income is taxable income in the United States.
Return on Investment (ROI) – Return on investment is a measure of the profitability of an investment. Forbes says that ROI compares how much you paid for an investment to how much you earned to evaluate its efficiency. There are two measures of ROI; Annual ROI and Total ROI.
Annual ROI is the percentage of net cash on cash return. If you made a $50,000 investment and earned $5,000 in year 5, the ROI for that year is 10%. Because net income fluctuates from year to year due to changing harvest volumes and prices, I generally ignore Annual ROI.
Total ROI is the cash profit of the investment period. Again, if you invested $50,000 on a product expected to last 30 years and the total projected net income is $200,000, then the Total ROI is 400%.
Self-Directed Individual Retirement Account (SDIRA) – Like the name implies, this is an IRA that gives you control over the investments that are held by the account by allowing you to branch out beyond the typical stocks and mutual funds. A self-directed IRA is a type of individual retirement account that allows you to save for retirement with assets that are off-limits for conventional IRAs, including precious metals, real estate assets and cryptocurrencies.
