Hey Guys—In the past, I’ve blogged about wealth building. Today we are going to pivot and talk about investing… big disclaimer here—I am not an investment expert. I simply look at historical trends and draw conclusions about good investments for the future.
Today I’m going to zero in on some alternative investments to the S&P 500 or bank CDs. There are some creative ways of investing in activities such as agriculture that should provide a decent return on investment over the coming years—including land, timber and food production. I’m excited to share what I’ve learned about these options and why I think they’re good investment choices.
The first thing I’d recommend investing in is real property, meaning land. If you’re familiar with Will Rogers, you might remember that he also invested in land, because it’s a limited resource.
"...out here I had been putting what little money I had in Ocean Frontage, for the sole reason that there was only so much of it and no more, and that they wasn’t making any more..." April 13, 1930
- Will Rogers
This is true more than ever. However, I don’t advocate buying speculative real estate such beach front housing or the picturesque view of a mountain in the distance. Instead, I encourage investments in agricultural lands that can be planted to crops and produce income.
There are several reasons for that. One is the idea that speculative real estate can quickly decrease in value with natural events such as wildfires or flooding.
But the main fact is that good farmland is becoming scarcer due to erosion. As with any scarce commodity is always becomes more valuable the less of it there is.
Farmland is becoming rarer because rain water is literally washing the lose tilled soils away… to the tune of 2.5 tons per acer per year. This means that as the world population continues to grow, we’re going to see less and less high-quality farmland that can be put into crop production, and the value of high-quality farmland will keep increasing. Over the past 14 years, farmland value has risen 134 percent, which is an increase in value of 9.59 percent each year. Not a bad rate of appreciation at all.
The cap rate is another interesting piece of information to look at. The national average crop land value is $3,140 per acre, and national average crop rent is $138. That’s an average cap rate of 4.3 percent.
Compare that to the average five-year CD, which currently runs at 1-3 percent.
You could also compare it to a real estate investment such as a trailer park, where you could easily get a cap rate of 9 percent—but that also comes with added management headaches and much lower appreciation. In contrast, if you have a long-term relationship with a farmer who plans to continue farming a piece of property over the next ten or fifteen years, you have a lot less volatility. This type of investment grows slowly, but also steadily, so it’s a great long-term strategy.
Here’s something else to consider. If you’re interested in investing in agricultural land but you don’t have enough capital of your own (such as half a million to $1 million to buy a farm) you can still be involved in real estate investments in the agricultural sector.
You can find investment opportunities by searching for a real estate investment trusts. These are simply ETFs that are put together by larger conglomerates that bring smaller investors together so they can invest in agricultural lands.
Have you been to a lumber yard recently? If so, you might have noticed that lumber prices keep going up. Timber prices have outperformed the S&P 500 for the last 100 years. Wow, looks like money dose grow on trees after all.
In fact timber has increased in value at a rate of 3% higher than inflation for the last 90 years. At the same time, the UN reports that the demand for lumber is going to double and possibly triple by 2050.
If you have the ability to invest in a tree today and you don’t need your money for the next 20-30 years, investing in timber is a smart move. You could even consider planting entire fields to trees.
As with farmland investments, if you’d like to invest in timber but you don’t have enough money to buy your own trees, there are companies that you can invest in. You could try investing in companies such as Plum Creek Timber or Potlatch both publicly traded companies. Or search Investopedia to find more options.
You’re not limited to the stock market, though. You could also partner with a landowner and plant your own trees or partner with a company that’s already planting timber, such as World Tree.
The great thing about timber is that there's an increasing demand and a shrinking supply. Timber is a renewable resource, too, so as it's harvested, it can be replanted or grow back again from the roots.
Investing in food production is a practical move because there is a constant demand. This outweighs the fact that commodities are costly to produced, that returns are low and margins are slim.
On a small scale, you can invest by partnering with farmers in your area by providing seed money for buying greenhouses, crop seeds or farming equipment. In a situation like this, you may get a much higher return than if you were to invest that money in the stock market.
Since we are taking a green stance here on this blog let’s take a stand against the soil wasting cropping practices of our day. Instead we will focus on drawing down carbon through intensive rotational grazing with cattle. Many people don’t want to be in the commodity market with cattle because cattle have only increased in price about one point, or around 8% a year every year for the last 27 years. If this straight commodity pricing dose not excite you to much. Look into direct-marketing the meat or transition your herd to grass only for a grass-finished product.
With a little creativity, you could turn an investment in cattle into a profitable enterprise. You could also increase your profitability even more by investing in other symbiotic enterprises such as sheep which have a higher individual ROI than cattle. When you run Sheep and cattle together you have what is now called a flerd. Flerds have many advantages among which are increased income from the same piece of land, less predator pressure and better pasture management.
Silvopasture: Accessing the Best of All Worlds
Piece by piece, agricultural investments makes sense—but where it gets really exciting is when you can bring all of these things ideas together.
Here’s a scenario to consider:
If you have the ability to invest in a farm and hire a farmer to take care of it, you could plant trees and graze animals in the ally between them. Or replace the grazing animals with other high return crops.
In this type of enterprise the cattle could make you a small return or even be run as a break-even enterprise that will pay for the land use that will give you a 4 percent return every year. The final payout would come when the timber is harvested, 30-40 years later. You could also get a large payout if you ever decide to sell the farmland itself.
Integrated agricultural investments make sense, both in the short term as steady earners and in the long term with timber and farmland sales. As you’re looking to diversify your portfolio, consider an integrated agricultural approach. It’s practical, and with a little creativity on your part, it could be fulfilling, as well. Who knows? Maybe the agricultural sector is just what you’ve been looking for.
Interested in learning more or have specific questions…
You can reach me at firstname.lastname@example.org