Food security is a significant concern worldwide in the present and foreseeable future. As investors, it’s crucial to acknowledge this issue and explore indirect investment opportunities in the agricultural sector. In this article, we’ll introduce you to a guide on investing in agriculture both directly and indirectly.
Investing in agriculture: global context
Over the last few years, the world has experienced a series of economic, financial, and food crises, hindering global poverty and hunger reduction efforts. Rising food and fertiliser prices can strain economies, making it challenging to maintain sufficient reserves.
Clearly, agriculture plays a pivotal role both now and in the coming years. Additionally, ongoing inflationary pressures are expected to persist in the next months.
Moreover, the ongoing conflict in Europe between Ukraine and Russia has global repercussions. Basic food items, including cereals, have seen significant price hikes.
Types of agriculture
When we talk about agriculture, there are two types of agriculture to consider:
Intensive agriculture is characterised by:
- Heavy use of machinery, fertilisers, and pesticides
- Low level of labour.
In other words, it is capital intensive.
This approach boosts overall production volume and crop quality. Intensive agriculture effectively addresses food shortages in densely populated regions by employing high-yield crops and advanced technologies to maximise yields.
However, when not done correctly, this practice can cause significant damage to the environment due to excessive use of resources, soil degradation, and chemical pollution. In addition, the products may not always be of great quality.
On the other hand, we have extensive agriculture, which is quite the opposite of intensive farming. This agricultural system involves:
- Large land areas.
- Limited use of technological capital and fertilisers.
- More labour and time-intensive practices.
- Greater reliance on natural soil fertility instead of synthetic fertilisers.
Extensive agriculture is known for its environmental commitment as it avoids harmful pesticides and fertilisers that can degrade soil and its nutrients. However, it doesn’t address the challenge of producing enough food to meet the needs of the entire population. It often requires additional practices like leaving land fallow to maintain soil health and fertility.
Extensive agriculture systems can be found in low-income countries where access to agricultural inputs like fertilisers, pesticides, and advanced machinery is limited. In such places, farmers may rely on large areas of land to raise livestock or grow crops, using fewer resources per unit of land because they are hard to obtain or expensive.
However, extensive agriculture is not limited to low-income countries. It’s also common in high-income countries, especially for certain types of farming like raising cattle for beef on large pastures. In these cases, the decision to use extensive methods may be based on factors like the availability of large areas of land, rather than a lack of resources.
Investing in agriculture: 6 simple ways
Now, let’s explore where you can invest in agriculture, with a focus on commodities and food products:
Wheat is fundamental in many cultures and appears in various foods, including bread, pasta, snacks, and processed meals. Nearly 20% of the world’s calories come directly from wheat, making it a vital food source for billions of people.
Wheat accounts for up to 55% of the daily caloric intake of 2 billion individuals worldwide. It’s a staple crop on every continent, with an annual production of around 428 million metric tons.
Corn is closely related to wheat and was historically cultivated primarily in the Americas, while wheat dominated Europe and Asia. A quarter of human calorie consumption comes from corn, making it a highly valuable crop.
Approximately 30% of global agricultural production is attributed to corn, serving both human and animal consumption. Corn is used in a wide range of foods, from tacos to cornbread, popcorn, and more.
Soy is a versatile crop with extensive use in various foods, animal feed, and industrial products, creating substantial global demand. It features prominently in Asian cuisine, appearing in products like soy sauce, miso soup, soy milk, and tofu. Soy serves multiple purposes:
- Human consumption: It’s a source of high-quality protein, found in tofu, soy milk, and meat alternatives.
- Animal feed: Soy is a common component in animal feed, especially for poultry, pigs, and cattle.
- Industrial uses: Soy is utilised in biodiesel production, paints, coloured pencils, and other industrial applications.
Global soy consumption has consistently risen over the past five years.
The largest soy-producing countries are the USA and Brazil, with over 100 million tons each, and far ahead of their third rival Argentina, with less than 40 tons per year.
Coffee stands out as one of the world’s major commodities, wielding significant economic influence for both producers and consumers.
Brazil, Vietnam, Colombia, and Indonesia collectively contribute to nearly 70% of total coffee production. Brazil, in particular, is responsible for nearly a third of the world’s coffee output.
Coffee has several uses:
- Beloved morning beverage: It’s famously known as the morning pick-me-up, providing a caffeinated boost to start the day.
- Flavour enhancer: Coffee is used as a flavouring agent in various foods, including ice cream, candies, and liqueurs, adding its distinctive taste to these treats.
- Food colouring: In some culinary applications, coffee also acts as a natural food colouring.
- Metabolism boost: The caffeine in coffee is well-known for its potential to increase metabolism and provide a temporary energy boost.
- Natural fertiliser: Coffee grounds, when used as a natural fertiliser, contribute valuable nutrients to plants, aiding in their growth and health.
According to the World Trade Organisation, global sugar production has reached approximately 2,000 million tons. In this context, Brazil, India, China, and Thailand collectively account for nearly 60% of total sugar production. Brazil, once again, emerges as the leading nation in sugar production.
Sugar finds diverse applications, including:
- Food products: Sugar is a key ingredient in various food items, including confectionery and bakery products, adding sweetness to our favourite treats.
- Industrial uses: It plays a role in the production of biodegradable plastics, contributing to sustainable packaging solutions.
- Animal nutrition: Sugar is also used in animal nutrition, serving as a source of energy and a palatability enhancer in animal feed.
Rice is a staple crop that feeds more than half of the world’s population.
In 2021 alone, global rice production exceeded 500 million tons, with China and India serving as the dominant producers. Nevertheless, countries like Indonesia, Bangladesh, and Vietnam have made substantial investments in rice production. Their efforts not only cater to local food needs but also contribute significantly to global rice exports.
Rice has a wide array of uses, including:
- Basic food source: It serves as a fundamental food staple for half of the world’s population, forming the basis of countless meals.
- Industrial applications: Rice is utilised in food processing, where it becomes a vital ingredient in various culinary creations.
- Alcoholic beverages: Rice is a key ingredient in the production of alcoholic beverages like sake and beer.
How to invest in agriculture?
You can invest in agriculture directly or indirectly.
- Directly: direct purchase of crops, land, machinery, farms, livestock
- Indirectly: investments in companies in this sector or other financial assets, such as futures.
In this article, we will focus on the second option.
You can invest indirectly in agriculture via:
- Exchange-traded funds and mutual funds
- Futures and other derivatives
Investing in agriculture: stocks
You can invest in agriculture via stocks. However, you need to sign up with a stock broker first. If you want to hold stocks in the long term, you may want to buy real stocks. One of the most competitive, zero-commission stockbrokers is eToro (check this eToro review for a full breakdown of features and costs).
However, if you want to trade in the short term, you may want to have a look at the best brokers to trade CFDs instead.
ActivTrades positions itself as a premier CFD brokerage in the industry, offering a wide selection of items solely available through CFDs. Investors have the opportunity to explore more than 50 forex pairs, principal worldwide benchmarks, and raw materials, in addition to an assortment of over 1,000 equities and ETFs. This brokerage also presents a trial version and boasts notably attractive spreads with no added fees.
Here are some examples of companies in this industry:
|Archer Daniels Midland||ADM||NYSE|
|Tyson Foods Inc||TSN||NYSE|
|CF Industries Holdings||CF||NYSE|
Investing in agriculture: ETFs
There are many funds nowadays suitable for investing in agriculture while on a budget. A fund is a basket of securities, so you obtain a diversified portfolio with ease. One of the most popular agriculture indices is the S&P Global Agribusiness Index, which is replicated by many funds. Here is a summary of its features:
- Method: Weighted by modified market capitalisation
- Launch: 2008
- Components: 24
- Geographical Diversification: 70% USA, 10.5% Norway, 8.5% Canada, Japan, China, Denmark or Holland, less than 5% each.
An example of a fund that replicates this index is iShares Agribusiness UCITS ETF listed on the London Stock Exchange.
Best ETFs to invest in agriculture and food
|iShares Agribusiness||SPAG||0,55%||DEGIRO review|
|Rize Sustainable Future of Food||FOGB||0,45%|
|GLOBAL X AGTECH & FOOD INNOVATION||KROG||0,50%|
Investing in agriculture: futures
Investing in agriculture through futures involves buying and selling contracts that promise to deliver a certain amount of an agricultural product at a specific time in the future. These contracts are a way for people to bet on the future price of things like corn, soybeans, wheat, or livestock. If you think the price will go up, you might buy a futures contract, hoping to sell it later for a higher price.
This kind of investment is often used by farmers and companies in the agriculture business to protect themselves against changes in prices. For example, a farmer might sell futures contracts for their crops before they are harvested. This guarantees them a certain price and helps protect against the risk of prices dropping later.
However, futures are also bought and sold by investors who have no intention of actually taking delivery of the agricultural product. These investors are simply trying to make money by predicting how prices will move.
Why should you consider investing in agriculture?
There are several reasons why it might be convenient to have exposure to financial instruments in this sector:
- Growth potential: Agriculture is a basic need because it produces food, which everyone requires. As the world’s population grows, the demand for food and other agricultural products is also expected to increase. This rising demand can lead to higher prices and potentially more profit for those invested in agriculture. New technologies and farming methods can also increase productivity, making the agriculture sector more profitable over time.
- Stability during economic downturns: Agricultural products are considered essentials because people need to eat regardless of how the economy is doing. This means that agriculture can be more stable compared to other sectors like technology or luxury goods during tough economic times. While it’s not entirely risk-free, investing in agriculture could provide some safety for your money when other parts of the economy are struggling.
- Hedging: You can use agricultural futures for hedging purposes even as a retail investor. Hedging means protecting yourself from financial risks. In the case of agricultural futures, you can buy or sell contracts to guard against price changes in things like corn, wheat, or livestock.
- Diversification: Investing in agriculture helps to diversify your investment portfolio.
Alternatives to investing in agriculture
- Investing in commodities
- Investing in metals
- Investing in oil
- Investing in precious metals
- Investing in silver
- Investing in water
Investing in agriculture: summary
Investing in agriculture offers a range of opportunities that go beyond traditional asset classes, providing not only diversification and hedging options but also significant growth potential and relative stability in economic downturns.
As the global population continues to expand, the fundamental need for food and agricultural products is likely to drive demand, making agriculture an increasingly attractive sector for investment.
Whether you’re interested in futures contracts, direct investment in farms, or agricultural stocks, gaining exposure to this sector can offer both financial rewards and the satisfaction of contributing to a vital global industry.
Is investing in organic agriculture different from conventional agriculture?
Yes, investing in organic agriculture can be different in terms of both risk and reward. Organic farming often requires more labour and different kinds of inputs, but the products typically sell at higher prices. Consumer demand for organic products has been rising, which could make this a profitable area for investment. However, organic farming is also subject to strict regulations, so investors should be aware of these challenges.
What are the environmental impacts of investing in agriculture?
The environmental impact of your agricultural investment can vary depending on the farming methods used. Sustainable or regenerative agriculture practices aim to minimise negative impacts like soil degradation or water pollution. Some investment platforms focus exclusively on sustainable agriculture, allowing investors to contribute to environmental preservation while also seeking financial returns.
Are there any tax benefits to investing in agriculture?
Tax benefits can vary depending on your tax situation and the type of agricultural investment you make.It’s essential to consult a tax advisor to understand the specific tax implications for your situation.