Consumers may see trouble ahead in rising food prices, but investors see opportunity. The soaring world population and the rising middle-class affluence in countries such as China and India are fueling a growing demand for food at a time when available farmland and water resources are reaching production limits. Agriculture is booming, and there are a variety of ways retail investors can support industry growth and enjoy the promise of steady returns.
Historically, agricultural investments have been in commodities such as soybeans, corn or rice. Investors buy and sell contracts for future crops at set prices. But commodities are complicated, high-risk investments affected by countless variables. Exchange-traded funds, or ETFs, offer access to commodities with less work and stress. Like mutual funds, ETFs group assets such as futures contracts for different crops or contracts for one crop from different growers. ETF shares trade like stocks, and their market value tracks a market index. Investors can buy and sell ETF shares at will, fund management fees are often minimal and capital gains taxes are paid only after the entire investment is sold.
Investments in agricultural commodities carry inherent risks. Droughts, early frosts and other random acts of nature can trigger significant seasonal losses even within farming’s overarching upward trend. For risk-adverse investors, stock in farming supply and equipment companies offers a conservative investment alternative to commodities. Farmers need quality fertilizer, better seed and new machinery to boost crop yields and meet the growing demand for food. Sales and growth of companies such as Illinois-based John Deere, a global manufacturer of farming machinery, and Mosaic, leading producer of phosphate and potash fertilizers in Minnesota, are expected to mirror gains throughout the agricultural sector.
With demand for food rising, farmers are looking to science for ways to improve crop yields. Biotechnology allows scientists to breed plants with stronger resistance to pests and pesticides as well as crops with a higher nutritional content and less fat. Corporate giants such as Monsanto and Ceres lead the biotech industry, but there are also several biotech mutual funds for investors to consider. Investors can also buy penny stocks in smaller capital-craving biotech start-ups listed on the Over the Counter Bulletin Board. Investors buy OTC stocks through brokers who negotiate sales with a network of dealers, or market makers. Investments in OTC biotech stocks are extremely risky, but they offer the potential for significant gains.
Retail investors can also put their money into farmland through small firms and funds managed by experienced farmers and real estate investors. Farmland generates annual returns through rental fees from farmers who work the parcels. According to Iowa State University’s Land Value Survey, the price of an acre of Iowa farmland land has increased from $1,926 in 2001 to $6,780 in 2011. While concerns have been raised over inflated prices and speculative bubbles, the value of farmland is tied to the value of the crops it produces. With growing demand, there may be some fluctuations, but farmland values are expected to remain fairly steady.
- Food and Agriculture Organization: The State of the World's Land and Water Resources for Food and Agriculture
- Wall Street Journal: How to Choose an Exchange-Traded Fund (ETF)
- The Street: 5 Agriculture Stocks That Analysts Love; Frank Byrt
- U.S. Dept. of Agriculture : Biotechnology; Frequently Asked Questions
- Iowa State University: 2011 Land Value Survey
- Bloomberg: Being Like Soros in Buying Farmland Reaps Annual Gains of 16%; Seth Lubove
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