Every month, I provide updates on my passive income goals and progress as I try to become financially independent. It’s a long road and I’m just getting started but the two main things that I want to work on are:
-increasing my passive income
-diversifying those flows in order to make sure that no 1 or 2 changes or events could knock me significantly.
I’ve mentioned it before and some of you might think this is insane but I’ve been considering getting involved in farming at some point. I’m not sure when it would happen and those real estate investments would likely happen before but I’m certainly looking into it and had some very interesting conversations with a few farmland investors in the past few weeks.
There are several good reasons but a clear one is the diversity this would provide. Don’t get me wrong. Selling crops is volatile and the prices can swing. I would argue though that it does still remain great diversification. The odds that the same event affecting companies like Microsoft (MSFT) or Aflac (AFL) in my dividend portfolio would also knock down my farming income are slim. Fact is that over long periods of time, farming has remained very stable with governments sometimes getting involved to smooth things to avoid having too big of an impact on consumers.
Yield But Low Volatility
Farming is a great example of a business that can provide solid yield on investment. You put an initial investment and after that it becomes about increasing the return on the land, limiting costs, etc. I also tend to think that no matter what ends up happening, that farm will continue to provide decent yield. In addition, farmland prices have seen less than 25% of the volatility of the S&P500 over 20 years. Not bad right?
As well, some say that owning gold is the ultimate protection in case things go bad but I would argue that farming is probably even better. Its value would remain very strong because it’s so tangible.
Long Term Perspective
If you think about it very quickly. Over the decades, we continue to eliminate farming land all around the world to build cities. The world population continues to expand and is likely to keep doing that for a significant amount of time. Much of that growth is happening in emerging countries which are quickly increasing food imports as they can gradually afford to do so. It shouldn’t be a shock to anyone that food prices have increased so much in the past few years and I honestly don’t think there’s anything that will stop that increase. There will be bumps and declines but over time, even with increasingly efficient farms, prices will continue to increase.
I don’t think it’s simply by luck that more and more investors are moving to farming to increase their income and profit from terrific opportunities. Jim Rogers, the commodity legend is one of those guys who is investing heavily.
-Costs And Complexities
If you think that I somehow know how to farm a land, take care of animals or anything else of that nature, you’d be way wrong. I don’t, have no one in the family or friends who has and I’d be insane to think that I could simply pick that up on the go. It’s not easy to do but you wouldn’t expect it to be either, if it were, everyone would jump in and opportunities would disappear. There are a variety of alternatives that can be used though:
-Farming funds: This is a logical first step. It requires a lot less capital to start off and requires little to no time (similar to buying a REIT compared to being a landlord). I would probably end up reading their annual reports and more which would help me gain “some” farming knowledge.
-I did find some Canadian funds managed by AGCapita (http://www.farmlandinvestmentpartnership.com/)
-Private Investor: Another would to find some way to get involved with an existing farm, by providing some financial support in exchange for return but also knowledge.
-Hire: I could also end up buying a farm, and then hire someone to run most of it. That could be a few individuals but there are also some companies that specialize in running farms which can be a more expensive but easier to manage alternative. Hertz Management (http://www.hfmgt.com/ ) was one such company that was mentioned to me.
-Buy A Farm And Run It On My Own: I don’t see how I could possibly even consider this but I guess that for some of you it could be an alternative.
I was also told that right now might not be the best time because the pricing is a bit high. That might be true but its’ something I’ll have to look into over time! I certainly wouldn’t just jump in at this point, I’ve got homework to do. Is there currently a bubble because of the bad weather and explosion of ethanol demand.
Other good resources:
What are your thoughts on adding farming to your passive income flows?