We’ve covered the many benefits of investing in agriculture, and we often highlight the ability to diversify a portfolio. But what does that really mean? Diversification is important for investors, financial planners, and fund managers alike, as it can help protect a portfolio during a downturn in the market. When other, riskier investments are performing well, it can be easy to forget about (or avoid) investing in safer, low-risk investments that don’t promise a large, immediate return. Nevertheless, diversifying a portfolio is essential and agriculture can make a great addition by providing stable returns with very low risk. Agricultural production is one of the oldest investments out there, and can also be one of the most stable and profitable.
A good rule of thumb when diversifying a portfolio is to look for variety, not quantity. Similar to real estate investment trusts (REITs), agriculture can provide both a hedge against inflation and a passive income. Unlike REITs, however, these investments provide tangible yield derived from naturally produced products with little correlation to the overall stock market. This means that these investments may grow when stocks fall and there is a lower risk of loss during an economic slump.
There are a wide variety of agricultural products, geographies, and methods in which to invest, and each has a different risk/return profile. Some of the most popular agricultural products to invest in are timber, row crops, tree crops, and livestock, though these are by no means the only investments available. Global population growth has continued to increase the need for these products, so agricultural investments are considered relatively safe. It can also be beneficial to practice geographic and commodity diversification. This will minimize the chance of a singular event damaging a portfolio.
Timber is a stable investment that’s not tied to the ups and downs of the stock market, though it is closely tied to the housing market. However, location is a key consideration when investing in timber. Timberland that is close to paper or saw mills often have a more steady income. Timber is also a long-term investment since trees take many years to grow and profits will not be immediate.
Row crops (such as corn, soybeans, and wheat) differ from other crops in that there will always be a steady demand, opposed to crops that may cycle in and out of popularity. That said, commodity prices are completely out of control of a specific farmer. Having too much exposure to a single commodity can put a portfolio at risk during global downturns. Fortunately, there are ways to mitigate the risk of commodity crops, by hedging in the futures market and with crop insurance.
Livestock investment opportunities come in a variety of forms. Some involve land ownership that provides leases to operators of dairy or other farms, ensuring a steady income to the landowner. Others can involve a direct investment in the animals themselves. Livestock returns vary by animal type, geography, and how the operation is structured. While considering adding alternative investments to your portfolio may be somewhat nerve-wracking, it can pay off in the long run. The low correlation with the stock market can play to your advantage when the market is down and can add stability to an otherwise volatile portfolio. Agricultural investments have also had a historically high return, and there is reason to believe these high returns will continue.
For all these reasons, agriculture is a solid investment to add to any portfolio. There are many different agricultural investments to choose from, and Harvest Returns can help you find the right one for you and your portfolio.