For investors looking to learn about the world of investing outside of equities and bonds, one area that can often be overlooked is agriculture. Yet, agricultural assets—like farmland, timberland, and commodities—are essential to our everyday lives and can be a great way to diversify investments. If you’re interested in long-term investment strategies that have the potential to generate profits while supporting crucial sectors, agriculture could be a sector to consider.

Why Agriculture?

Before diving into the details, you might be wondering: Why invest in agriculture at all? Agriculture is one of the oldest and most essential industries in human history. Whether it’s the food we eat, the clothing we wear, or the materials used to build our homes, most of it comes from agriculture.

Beyond its importance, agriculture can be a stable investment. Unlike popular tech stocks, which can be unpredictable, agricultural assets are tied to physical goods that will generally always be in demand. People always need food, timber, and other products that come from the land.

Timberland vs. Farmland

Let’s start by comparing two types of agricultural assets: timberland and farmland.

Timberland refers to forests that are used to grow and harvest trees for wood, paper, and other products. Investing in timberland means owning forested land or investing in companies that manage forests. As we all know, trees take a long time to grow, sometimes several decades, but the timber can be sold for high prices once it’s mature. Timberland investments are seen as long-term because of the slow growth of trees, but they can provide stable returns. Plus, trees are not impacted by financial market volatility, providing an uncorrelated risk profile to most other asset classes.

Farmland, on the other hand, is used to grow crops like sugar, wheat, soybeans, and cotton. Investing in farmland can be done by directly owning land or by investing in agricultural companies or real estate investment trusts (REITs) that focus on farmland. Unlike timberland, which has a long-term focus, farmland can provide more frequent returns since farmers harvest crops every year. However, farmland investments are often affected by things like weather, pests, and market prices for crops, which can make them riskier in the short term.

In comparison, timberland offers relatively more long-term stability but slower growth while farmland provides more frequent returns but can be affected by unpredictable factors like weather and crop diseases. Both are solid investments, but which one is better depends on how much risk you’re willing to take and whether you prefer long-term growth or shorter-term income.

Investing in Companies vs. Direct Commodities

Now, let’s talk about two different ways to get exposure to agricultural commodities—things like wheat, soybeans, or lumber. You can either invest directly in the commodities or in companies that deal with them.

Investing in companies with commodity exposure involves buying shares in companies that produce or deal with agricultural products, like large farming corporations or timber companies. When you invest in these companies, you’re not just betting on the price of the commodity itself, but also on the company’s ability to manage its business. For instance, a company that makes paper from timber might see its stock rise even if lumber prices are low, as long as it’s running its business efficiently.

Investing in commodities directly means buying the actual commodity, such as gold, corn, or crude oil. You wouldn’t physically own barrels of oil or bushels of wheat, though—most people do this through commodity futures contracts or ETFs (which we’ll discuss in a minute). The main difference is that when you invest in commodities, you’re betting purely on the price of that commodity going up or down. Commodities can be volatile since prices are often affected by external factors like weather, natural disasters, or political events.

In comparison, companies with commodity exposure can offer more stability because they can make profits through other parts of their business, even if commodity prices fall. Commodities themselves are riskier because prices can fluctuate a lot, but they can also offer higher returns if you’re able to predict price movements correctly.

Commodity Futures: A Risky, but Potentially Rewarding Strategy

If you’re feeling more adventurous, you might want to explore commodity futures. A commodity future is a contract to buy or sell a specific amount of a commodity at a certain price at a future date. For example, you could agree to buy 100 bushels of wheat in three months at today’s price. If wheat prices go up during that time, you could sell your contract for a profit, but if prices fall, you’ll lose money.

Futures are risky because they involve predicting future price movements. It’s a bit like guessing the future price of a stock, but with more factors involved—like weather, global trade, and supply shortages. Futures can offer significant rewards if you’re predictions are correct, but they can also cause large losses if you’re wrong. For this reason, futures are often best suited for experienced investors with diversified portfolios.

ETFs: A Safer, Simpler Way to Invest in Commodities

A safer and simpler way to invest in commodities is through Exchange-Traded Funds (ETFs). For commodities, ETFs might track the price of oil, gold, wheat, or even timber. By buying shares in a commodity ETF, you can gain exposure to the prices of those commodities without having to manage futures contracts yourself. For example, if you wanted to invest in agriculture, you could buy shares in an ETF that tracks the prices of major crops like corn, soybeans, and wheat. As the prices of those commodities go up or down, the value of your ETF shares would change accordingly. ETFs are usually less risky than futures because they spread your investment across multiple assets, rather than being tied to the price of just one commodity.

Compared to investing directly in futures, ETFs are generally simpler and safer, making them a good option for less experienced investors. They allow you to invest in commodities while taking on relatively lower risk. Futures on the other hand can offer higher rewards but are much riskier and more complicated. They require predicting market movements and are generally not recommended for inexperienced investors.

Agricultural investments might not seem as flashy as tech stocks or cryptocurrencies, but they can offer real value and stability, especially over the long term. Whether you choose to invest in timberland, farmland, agricultural companies, or commodities themselves, the key is understanding your risk tolerance and investment goals.

In summary:

• If you’re looking for long-term growth, timberland could be appealing. If you want more frequent returns instead, farmland could be considered.

• Investing in well run companies gives you a way to benefit from agriculture without worrying about commodity price fluctuations, while direct commodity investments can be riskier but offer the chance for larger profits.

• For those willing to take on more risk, commodity futures could be exciting, but if you prefer a simpler and safer option, ETFs are a good way to gain exposure to agricultural commodities.

Understanding these different agricultural assets can help you make smarter investment choices and build a portfolio that’s both diverse and will stand the test of time.

To discover more call 1300 683106 or email us on investordesk@nab.com.au

The information contained in this article is gathered from multiple sources believed to be reliable as at October 2024 and is intended to be of a general nature only. It has been prepared without taking into account any person’s objectives, financial situation or needs.. Before acting on this information, NAB recommends that you consider whether it is appropriate for your circumstances. NAB recommends that you seek independent legal, property, financial and taxation advice before acting on any information in this article.

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