Funding An Investment Farm: Strategies For Success

Investing in farmland has become an increasingly popular alternative investment option, with many investors seeking to capitalise on the growing global demand for food. In this paragraph, we will explore the various ways in which individuals can fund an investment in a farm, including direct ownership, real estate investment trusts (REITs), agricultural stocks, mutual funds and exchange-traded funds (ETFs), and crowdfunding platforms. Each of these options offers unique advantages and considerations, which we will delve into to provide a comprehensive understanding of the available funding strategies for aspiring farm investors.

Owning land directly

When considering owning farmland directly, it is crucial to understand your budget and operational needs. Compare the costs of purchasing and renting land, and check land values and rental rates to ensure they align with your financial capabilities. Additionally, assess the climate and growing conditions to ensure they match the requirements of your specific farming operation.

Another option within direct land ownership is to purchase an existing farm through a sale-leaseback transaction. In this scenario, the current farmer continues to work on the farm and pay rent to the new owner. While this option may be less risky and more passive, it could result in a higher land price and a lower cash yield for the investor.

Alternatively, you can buy an existing farm or agricultural land and lease it to a new tenant. This approach may generate a higher investment return, but it will likely require more effort to find a suitable tenant.

For those seeking the highest potential returns, acquiring non-agricultural land and converting it into cropland, pastureland, or an urban farm is an option. However, this choice requires the most work, as it involves transforming the land for farming use and finding the right crops and tenants.

Overall, owning land directly provides investors with control over their farming operations and the potential for solid returns through rent yields and appreciation of farmland values.

Real estate investment trusts (REITs)

REITs offer investors several benefits, including stable cash flow through dividends, attractive risk-adjusted returns, and diversification. They are also a way to gain exposure to the real estate market without the complexities and headaches of directly owning property.

There are three main types of REITs:

• Equity REITs: These own and manage income-producing real estate, generating revenue primarily through rent.
• Mortgage REITs: These lend money to real estate owners and operators, either directly through mortgages and loans or indirectly through mortgage-backed securities.
• Hybrid REITs: These combine strategies from equity and mortgage REITs, owning and operating real estate properties while also holding commercial property mortgages.

When it comes to investing in REITs, there are a few options:

• Publicly traded REITs: These are traded on public exchanges and are the most accessible option for newcomers.
• Public non-traded REITs: Registered with the SEC but not traded on exchanges, making them less liquid but also less volatile.
• Private REITs: These are not registered with the SEC and are generally only available to institutional investors.

Overall, REITs can be a good investment option, offering steady income and diversification. However, it's important to consider the risks, such as sensitivity to interest rate changes and economic downturns.

Agricultural stocks

Some widely held agricultural stocks include:

• Archer-Daniels-Midland (ADM)
• Corteva (CTVA)
• Scotts Miracle-Gro (SMG)
• Bayer AG (BAYRY)
• Deere & Co. (DE)
• ICL Group Ltd. (ICL)
• Nutrien Limited (NTR)
• Zoetis (ZTS)

These companies offer a range of products and services, from crop protection and bioengineered seeds to agricultural machinery and animal health medicines.

In addition to individual stocks, investors can also consider exchange-traded funds (ETFs) that focus on the agriculture industry, such as the VanEck Agribusiness ETF (MOO) and the Invesco DB Agriculture Fund (DBA). These ETFs provide diversified exposure to a range of agricultural companies or commodity futures, respectively.

Farmland mutual funds and ETFs

Farmland mutual funds and exchange-traded funds (ETFs) are a great way to invest in the farming sector without the challenges and high costs of buying and managing a farm. These investment vehicles provide diversification, liquidity, and lower capital requirements compared to direct farmland ownership.

When considering farmland mutual funds and ETFs, it is important to note that they may invest in adjacent sectors and might not solely focus on agriculture. For example, the Fidelity Agricultural Productivity Fund (FARMX) invests primarily in agricultural productivity companies, with its largest holding being Deere & Co. (DE), a well-known agricultural machinery manufacturer.

ETFs, in particular, offer a diversified set of businesses, investing in companies that derive a substantial portion of their revenues from agriculture. For instance, the VanEck Agribusiness ETF (MOO) provides access to a range of businesses, ensuring at least 50% of their income is from agricultural sources.

It is always advisable to carefully review the management fees and performance of the index tracked by the ETF or mutual fund. Additionally, investors should be aware that these funds may have exposure to other sectors, so a pure farming or agriculture investment may be better achieved through other asset classes.

Crowdfunding platforms

Crowdfunding is a unique way to fund your farm, which, while it takes work, offers incredible benefits. It is a challenging way to raise money, but with some planning and help from experts, you can be on your way to gathering donations in no time.

Benefits of Crowdfunding

Firstly, you can often crowdfund your farm (or part of your farm) with no payback. This means freedom from monthly payments, giving you the freedom to scale without financial stress. Secondly, crowdfunding kickstarts the buy-in that you need from your local community. You will have the opportunity to meet market managers, farmers' market goers, and others who could impact your farm later on. Finally, crowdfunding and the feedback you receive during your campaign give you precious insight into your audience.

Challenges of Crowdfunding

Today's potential crowdfunding donors are a wary breed. Most potential donors have encountered crowdfunding in some way, and for every success story, there are ten or more horror stories. Poorly planned crowdfunding efforts often fail, and most locally planned or small crowdfunding drives are poorly planned. Many in your community may have become jaded by the plethora of mediocre crowdfunding drives clamoring for their attention.

Types of Crowdfunding

There are five types of crowdfunding: financial return equity, debt, royalty, non-financial reward, and donation. If using a crowdfunding website like GoFundMe or Kickstarter, a non-financial reward donation system will work well. This is almost the most common type of crowdfunding, with about half of the $10 billion expected to be fundraised in 2014 being non-financial reward-based.

Tips for a Successful Campaign

• It takes months to build a crowd – sometimes up to a year or more. Expect about 5% of your crowd to donate to the cause at an average donation of $10.
• Donors will not give unless they know, like, or trust you. Use emotional pull in your campaign video to build your fans.
• Within your project budget, be sure to include the costs of rewards because the rewards are not free.
• Educate yourself on the fees involved with using crowdfunding platform sites, which can be anywhere from 2% to 9% of funds raised. Using PayPal will also result in a 3% fee.
• If you aren't at 1/3 of your target goal within 2 weeks of kicking off your campaign, it will probably not be successful.

Example Crowdfunding Platforms

• Barnraiser
• Kickstarter
• GoFundMe
• KivaZip

Frequently asked questions