The stock market is where most investors invest the majority of their money, but is that really the safest place for it? Some analysts have called the current investing environment “the everything bubble” and are predicting that the next financial crisis could eclipse the one of 2007-2008. Lofty equity valuations along with continued low yields have driven more and more people towards alternative investments to protect and grow their wealth. Commercial real estate, precious metals, oil, and gas are well known alternative asset classes; agriculture is somewhat lesser known, but nonetheless important to consider. How do agricultural investments stack up against investments in more traditional stocks?
Risk: The Stock Market
An investor in the stock market faces the risk that the company they invested in will lose money or declare bankruptcy, or simply that the broader market will correct, and bring most equities down with it. These risks can be mitigated by diversifying, but even with the most diverse stock portfolio, an investor still faces the systematic risk of the stock market. Events that impact equities markets to varying degrees include recessions, political turmoil, changes in interest rates, and major terrorist attacks.
Investors in agriculture face much different risks than those in the stock market. Many of the events that could sink a stock’s value would have little effect on an investment in agriculture. There are different risks associated with these investments; fire, drought, pests, or disease can damage crops. In the case of agriculture, however, geographic and commodity diversification will usually protect against these risks. Hedging and crop insurance are also available for some commodity crops.
Returns: The Stock Market
There are varying claims of what kind of return you can expect from the stock market, and it largely depends on the mix of one’s portfolio and how long you stay invested. Warren Buffett has said that you can expect a 6-7% return, but again, that’s if you keep your money invested for the long-term.
Like stocks, any single agricultural investment may not have consistent returns, but over the past 25 years, the annual return on farmland has averaged 11.5%, according to the National Council of Real Estate Investment Fiduciaries’ Farmland Index. Returns are tied to profits, so changes in the price of the commodity have the largest impact on investment returns.
Social Impact: The Stock Market
Though some publically-traded companies purport to be socially conscious, investments in stocks are generally impersonal. There is little connection between a stock owner and the management of a company.
Social Impact: Agriculture
Investments in private agriculture deals can be very personal, depending on how much you care to know about the farm you are investing in, and the capital investors bring can have an enormous impact on a family and a community. Farmland produces a tangible product that everyone on the planet uses. Investing in agriculture gives you the opportunity to be a part of something vital to everyone on the planet.
There are many unique benefits that agricultural investments can provide, so it may be time for you to consider adding them to your portfolio. While these opportunities may feel unfamiliar or intimidating to the average investor, they can pay off for those willing to explore them a bit more.