Mutual funds and side businesses are among options to consider
In recent years, producers used record farm income to make large investments in land and equipment. Yet the needle barely moved on non-farm investments.
As land values peak and used machinery values fall, a growing chorus of experts advises considering new strategies to diversify portfolios.
AgStar Financial Services likes to see its producer-clients have 10% of their investment portfolio out of agriculture. The company is one of the largest Farm Credit Service associations. The guidance is particularly true for livestock producers enjoying strong profits, though crop producers should develop long-term investment plans for better times.
Often, producers are tempted to invest profits in the operation, even though off-farm investments can provide a cushion against the next market trough. An increasing number of farmers place some profits into financial products, including 401(K)s, black-top companies, LED light bulb firms and businesses that build equipment for golf ponds.
Caution is advisable. Producers should learn about a business before investing, and not everyone agrees investments outside of agriculture are a good idea.
“On paper, it looks good, but in practice I haven’t seen many people be successful at it,” says Darrell Dunteman, a CPA with Bonnett & Dunteman, Bushnell, Ill. In his view, a better strategy is to leverage the farm business differently. “Non-ag ventures often take both money and management away from the farm business,” he explains.
Farmers have 80% to 90% of their asset base in agriculture, USDA data show. One reason is most producers take an operations approach rather than an asset-management approach, says Mike Boehlje, Purdue University ag economist. The asset-management approach requires a formalized business plan, a component even highly successful farm businesses often lack.
Aim To Protect Wealth. “Producers in the mid- to late-cycle of their careers have more risk exposure if they don’t have a strategy to protect wealth,” Boehlje explains.
The rate of return from land can be quite high, but if land is the only place producers are investing, they are at higher risk than if they diversified their portfolio further. Think strategically about investment, Boehlje advises. He points to the Enron scandal of 2001 as an example of what can happen without a diversified approach. Many employees lost not only their jobs and income but also much of their 401(K) investments, which contained large volumes of Enron stock.
Admittedly, developing expertise in other industries is tough for producers, Boehlje says. Because of that, Boehlje favors mutual funds, which have liquidity and allow producers to reduce risk by investing in a broad spectrum of industries.
It also is relatively easy to compare the performance of mutual funds over a certain period of time.
Increasingly, brokerage firms such as Piper Jaffray have become active in rural communities. Lenders can also serve as sources for investment advice, he says.
As a prerequisite to analyzing investment options, producers first need to learn to accurately analyze the financials of their farm business, adds Danny Klinefelter, Texas A&M University ag economist. Do this on an enterprise basis and also drill deeper to a per-field basis.
“That requires managerial accounting, accrual accounting and a different approach,” he says.
Plan For The Future. Although it might appear farmers invest in farm assets at a higher rate than they did five years ago, some context is important, explains Paul Ellinger, ag economist at the University of Illinois. The rapid run-up in farm asset values in recent years has increased farmland investment portfolios even if producers haven’t been aggressive land buyers.
“No other asset value was going up at the same rate as land,” Ellinger points out. Theoretically, investment diversification makes sense, “but we have to look at reality,” he says. Large down payments are required in order to buy land, which can make it hard to invest in farmland as well as off-farm opportunities.
Developing the right investment balance is complicated and requires farmers to plan, Ellinger cautions.
Producers who want to diversify their portfolio should first meet with a licensed financial planner who can help perform a cost-benefit analysis and create an investment strategy and risk assessment.
How To Diversify Your Agriculture Investments
Opportunities to diversify a farm portfolio are infinite, even within the agriculture industry, explains Danny Klinefelter, ag economist at Texas A&M University. On the other hand, producers should be cautious about entering side businesses with unintended financial consequences, notes Darrell Dunteman, a Bushnell, Ill., CPA with Bonnett & Dunteman. The water shortage in California, for example, has led companies to contract with Midwest growers to produce vegetables. Yet typically, the primary beneficiaries are early adopters who cash in on premiums. “Once enough people are doing this, the premiums come down,” Dunteman says. “I haven’t seen many people succeed at this. After five years, there’s not a lot of money in it.” On the other hand, new business ventures can succeed if other family members have the interest and ability.
Farmland- Buy multiple farms in a single state, farms in different states and regions or even outside the U.S.
Crop Mix- Expand into organic or non-GMO crops and seed, which carry a premium.
Ag Businesses- Become an owner of or a partner in an equipment dealership, grain elevator or custom spraying business.
Consumer Products- Potato chips and cheese are among products some farms produce. Success isn’t always easy, as products are linked to the farm but different.
Related Markets- Consider industries such as the turf market. Dunteman explains how a client in the turf business for commercial and private buildings expanded into the sports turf business and, later, turf for sports stadiums.
A new fund might soon permit investments in ag companies and farmland.
Firm Considers Adding Ag Fund
Non-ag funds are a good fit for producers looking to diversify business portfolios, but most farmers are more comfortable keeping investments in agriculture, says Tony Hallada, CEO of CliftonLarsonAllen Wealth Advisors. Because of that, his company is investigating whether to making equity offerings to farmers who want to invest in ag companies and farmland.
“We’re still in the early stages,” Hallada explains. The fund would include private equity offerings for companies such as equipment firms and those providing niche products such as grass-fed beef. Firms proposed for the fund are not listed on the stock market. Hallada is in discussions with several companies that could provide capital for such an offering. He acknowledges that having at least 10% of a farmer’s net worth in non-farm assets is a good strategy to aim at.