Like stocks or other traditional assets, agricultural investments include many different sectors within the industry as a whole. With all of the available options, how does one decide which types of crops to invest in? One of the most common options is row crops. These commodity crops ‒ such as wheat, corn, and soybeans ‒ are staples of almost every country’s diet, and have historically been used by investors as a hedge against inflation. In addition to being consumed, these products are often used in feed for livestock and are the raw ingredients of almost everything we eat. The need for these crops will never subside; grains, corn, and soy are so prevalent in the food industry that demand is guaranteed to stand the test of time. The United States is the largest grain exporter in the world by quite a significant margin, and recent price stability is a good sign for both farmers and investors alike.
So what makes row crops a smart choice when looking at alternative investments for your portfolio? Like many agricultural investments, row crops typically have a low correlation to economic cycles, meaning this investment can be used to hedge against other investments in stocks and bonds. Since World War II, returns on grain have been uncorrelated to the stock market cycles. Investments in crops can also benefit from inflation, which may negatively impact stock and bond investment returns. When the price of processed food rises, the price of the raw materials needed to make that food will rise as well. What about returns? Investors can expect to make less money from row crops (generally single digit returns) than they can from specialty crops. But because these returns can be hedged with commodity futures and insured, row crops represent a very safe form of steady yields, plus long term land appreciation.
Like with any agricultural investment, population growth is a primary driver for the investment. The changes in the standard of living worldwide have also led to increases in the price of these commodities. Row crops can include all sorts of grains, such as wheat, barley, and oats, as well as corn and soybeans. The vast majority of diets worldwide include some sort of grain or other row crop, but not all countries have the ability or capacity to meet the production needs of their population and therefore must import what they cannot produce. The increased need for grains does not necessarily mean people are consuming more grains, though that is part of the explanation. As consumption of beef, chicken, and other meat increases, the need for grain to feed livestock with also increases and the demand for these row crops rises.
As the need for food continues to rise, as it is projected to, commodities like grain and corn will continue to gain value, making them a smart choice for investing. Organic row crops are increasingly in demand also, and can bring higher returns for investors. Besides food, row crops have been used for biofuel. Row crops are susceptible to different risks than traditional investments. These risks can include poor weather, natural disasters, or crop disease that impact the value of the crop. It is important to note that like many agricultural investments, row crops are not intended for immediate returns, but are intended for investors with a long term outlook.