As with any investment, there are risks associated with agricultural investments. Some of the risks in this particular asset class include drought, fire, pests or disease that could damage crops. Politics can also play a hand when it comes to agricultural restrictions and risks.
Minimizing Risks Associated with Farmland Investments
Geographic and commodity diversification can usually protect against any risks. Hedging and crop insurance are also available for some commodity crops. When investing in farmland, you want to work with a partner who has a proven track record for successfully managing farms and an eye for finding high-profit potential properties that have as little risk as possible.
OTHER FACTORS TO CONSIDER
Here are some factors to consider when determining if an investment in farmland is right for you. And if it is, what should you look for when choosing a property?
Farmland is a Long-Term Investment
Investors must realize that it is a long term investment. Return on an investment can vary from 12 months to 2 years before seeing your first return. They must also realize there are short term fluctuations in commodity prices, and returns are better measured over longer periods in farmland investments.
Organic vs. Conventional
Organic farmland investments are a good investment. However, not all soil and geographical locations are suitable for organic production. A good conventional farm may not make a good organic farm. There are many variables that need to be analyzed before buying organic or converting conventional farmland to organic.
Diversification across Crops and Geographies
The ideal farmland portfolio will have a variety of farms, producing multiple different crops. Different locations of farms will provide a good hedge against risk factors such as drought, pest infestation or weather.
Soil Fertility & Water Availability
When investing in farmland, soil fertility and water are the two most important factors. Soil is classified under class 1, 2 and 3 soils. Class 1 is the best. There are a variety of crops that can grow in different soil types and it is important to match the commodity grown to the proper soil type to maximize yield. There are three water sources as well, including rain water, well water and surface water (delivered from a lake or river on demand). All farmland must have one or all three sources for it to have a chance at being a good investment.
With an ever-increasing global population and demand for food, farmland offers a truly unique investment opportunity with inviting long-term returns. Investing in farmland has also proven to provide diversification to portfolios along with a hedge against commonly unstable stock market corrections.