Savvy investors have long realized the advantages of owning real, tangible assets, especially those backed by underlying land. Real estate, both commercial and residential, is probably most familiar to alternative investors. But agriculture offers many of the same benefits, and can help diversify the real asset portions of a portfolio. In most cases, both commercial real estate and agriculture produce yield by collecting rents from tenants and returns from the appreciating value of land and the improvements on that land.
Variety is the Spice of Life
Both real estate and agriculture represent a wide spectrum of property (or crop) types. The real estate investment universe includes single family homes, multifamily apartments, commercial office buildings, and retail. Each of those categories can be even further divided into more specialized areas. Production agriculture includes specialty crops, row crops, timber, livestock operations, and some newer types including vertical and urban farming. And again, these various products can be further specialized into categories by how they are grown, such as conventional farming, organic farming, and by the scale of the operation.
Location, Location, Location
Location is just as important in agriculture as it is in real estate. In real estate, a desirable commercial property might be located on a high traffic intersection or a multi-family asset might perform better in an area with a growing and diversified economy. In agriculture, a desirable farm has good soil, access to water, and proximity to infrastructure like roads or processing facilities. Additionally, while one real estate market or property type might be on fire, others might have fallen out of favor with investors or simply because they are in economically depressed areas. Unlike real estate, the products of agriculture are mobile, so generally the commodities produced can be transported across state or international boundaries. Of course some commodities, like coffee or cocoa, are less perishable than others, like lettuce or beef. Before investing, it is important to understand the complete supply chain of an agricultural commodity, from production, to processing, to transport to market.
Ups and Downs
Generally, both real estate and agriculture investments are long duration, illiquid, and hence don't suffer the volatility of the stock market. Like real estate, agriculture commodities tend to move in cycles, and when prices of a particular crop are depressed for an extended period of time, land values can begin to fall too. These market dips provide opportunity for the smart real asset investor. With few exceptions, agriculture rarely experiences "bubble" markets, such as those that occurred in residential real estate prior to the financial crisis of 2007-08. In the future, both asset classes will benefit from unstoppable demographic trends. Housing and food are two necessities whose demand increases with a growing population. Global urbanization decreases arable land, increasing farmland values. Finally, as populations increase in wealth, they tend to eat more protein, another factor favoring the long term outlook of agriculture investments.