Did you know that agriculture is, maybe, the oldest investment and one of the most lucrative business opportunities directly connected with the survival of the human race? Well, for dozens of centuries, vast fortunes have been created around the world from farming; plantations and agriculture, while hundreds of millions of people have been making their living from small-scale agro forestry facilities.
Economically, savvy investors have been putting cash in hard assets as an inflation hedge against future and present economic uncertainty for at least the last two decades. While much of this demand for these hard assets has poured into precious metals and energy, other investors have been buying farmland as an investment hedge against future inflation in food prices.
Investors are often drawn to farmland based upon its cash flow potential (rents or crop yields) in addition to its capital appreciation. Additionally, many investors who are seeking less exposure to paper assets often find that farmland offers the type of diversification that they desire.
For years now, farmland has been attracting purchases at phenomenally low prices. However, as more investors line up to buy, supplies of good arable farmland is declining, causing prices to go up.
For the millions of people who have followed the corporate-controlled mainstream media’s financial a™dvice to “buy a house and max out your money”, investing in farmland probably sounds exotic and even perhaps risky.
One of the best assets to own during times of crisis, and especially during a period of growing inflation, is farmland.
The Returns on Farmland Investing
A well-run farm typically provides an investor with a minimum annual return of 10%-15%. And the investment returns are only expected to increase as the global population continues to explode and a growing number of people from emerging nations join the ranks of the middle class. On average, people living in emerging nations consume about 70 pounds of meat per year. While that is much lower than the 176 pounds of meat consumed annually by the average person in the developed world, the global middle class is rising and the trend towards increasing food prices is firmly established.
Physical farmland is not for everyone
Just because farmland can be a solid investment with great future potential does not make it a great investment for everyone. Investing in physical farmland requires time and a large amount of financial capital to get started. The risks are numerous including: unpredictable weather patterns, potentially large upfront costs, lack of liquidity, and the fact that it can be a downright complicated process for the uninitiated.
Investors who employ others to do the “dirty” work own nearly half of the farmland in the World. Of course, this hands-off approach eats into profits and increases risk significantly.
First, you have to identify good fertile arable land. Once you settle on an area that you want to invest in, begin working with a local rural real estate agent who specializes in working with farmland investors.
As you go shopping for land, you may be surprised by the prices. Arable farmland can be much more expensive than what you expect. People think that any piece of land can do the job. Well it is not so easy. Good farmland requires fertile soil, good rainfall, water supplies, electricity, accessibility and other characteristics for it to be lucrative.
The better the land, the more you have to pay. A quick market research around Kenya will give you prices from Sh150, 000 to over Sh1, 000,000 per acre depending on the location, accessibility and facilities provided from the land. There are some few options to buy land below Sh150,000 but the money and time required to spend in order to make the land arable does not make any sense to invest. For example, buying a piece of land which does not have public accessibility could simply be a useless piece of land. If water is not there, or connecting with electricity will require paying for several killometres of connection then again the land that initially sounded cheap will become very expensive.
Choosing the right land for the right crops
You found the perfect piece of land but is it really so perfect? Before you even start looking for the land you want to buy, you need to know the crops you want to grow. A successful farm or plantation is directly connected with the proper identification of the land that will fulfill all the requirements for the crop or tree you intend to grow.
In order to do that, you have to be very scholastic with all details; rainfall, altitude, inclines, type of soil, water, even transportation facilities and logistics have to be considered. You need to consult an agronomist specializing on the type of crop you are planning to grow in order to get all the requirements for maximum returns on your investment.
All the above obviously include costs but these are necessary in order to make your business plan properly and achieve success.
So, how do you choose the right crop or tree that you want to grow? Usually, people prefer to grow the easy and common crops like maize, mangoes, orange etc. That is not a bad option at all. Fortunately, there are ways to diversify and why not do better than the others. For a crop to grow, you need to understand that the price of your final product is relevant to the markets, the demand and the supply as well as to weather conditions.
Growing a crop or tree that can be sold only in one sector of the economy for example the food market, increases the risk of losing money. Nowadays, all big farming and plantation corporations are following more and more what is known as the “Modern Portfolio Theory.” It sounds a bit complicated but it is not and it can definitely make your return on investment increase.
The Modern Portfolio Theory for Agroforestry
As mentioned before, growing a specific crop that can be used only in one sector of the market hides a lot of risks. If for example within this year, the production of maize is great then the huge supply will overcome demand and prices will drop. Growing sensitive crops like maize could also lead to a bad production due to weather conditions. The result in both cases will be the same – low or no income.
The Modern portfolio theory suggests to hedge. You can simply hedge if you choose a crop or a tree that can be used in several different markets. Imagine you grow a tree that can make you money in the food industry, energy, construction, flooring, or even in the clothes industry while you can also make money by selling green carbon units.
With each annual harvest, you can choose the market to sell your production to. That gives you the option to diversify and maximize your annual returns. If for any reason prices are down one year in the food industry you can use your products in the energy sector and vice versa.
How to choose the right crop or tree to grow?
The best way to do it is to consult an agronomist and your financial consultant who will give you the ideal business plan and cost break down. All successful companies dealing with farming and or plantations have several specialists and advisors who are paid in order to produce the best opportunity scenario for every agro forestry project. In any case, if you are not willing to get a professional opinion, you should at least do a very good research to minimize the possibility of a failure or low returns.
So what is the best way to go?
In modern times, it has been proven that synergies are the best way to create wealth and success. In several occasions, we exclude income and wealth producing opportunities from our portfolio simply because they require too much money, time and effort. If it were easy, everyone would be rich.
If so far you find all the above information too complicated and you are about to decide to skip this type of investment, I have to tell you, “hold your horses”. There are other options that are not so complicated.
In the world today, there are big corporations managing farms and creating huge returns year after year. They have the size and the capacity to invest in technology, market analysis, innovation and research in order to maximize the returns they produce from their agro forestry projects. Some of these firms believe in partnerships and they are giving the opportunity to individual investors.
In my opinion, the best way to do so is the option they give to investors to purchase a ready arable fully organized farm or plantation which is 100% taken care of and managed by the corporation and insured against any possible natural disaster. Obviously, they will charge you a management fee but the benefits you get overcome any cost you might have as in most cases you only pay their fee upon production.
The size of the corporation and its structure will determine the way you can make money. In several cases, they have a vertical production line and they will almost guarantee you a minimum price for the crop they will produce on your behalf. The possibilities are unlimited and like they say, partnering with a big player is more cost effective than trying to run a farm on your own.
Going green is the way to produce wealth all around the world. All you have to do is to choose the right way to do it. Doing it alone or partnering with an agricultural corporation is the new way to go.
Written by Kosta Kioleoglou
Civil Engineer – Msc DBM
REValuer by TEGOVA