Agriculture a Safe Investment

Jeff Siegel

Written By Jeff Siegel

Posted October 3, 2011

The farm hasn’t been worked in nearly 30 years.

The remnants of a once-thriving apple orchard make it the perfect set for a horror movie: skeleton trees, blankets of fog in the early morning, and an old farmhouse that leans to the left, creaking every time the wind blows.

It’s not easy to get to, either. The half-mile road that snakes along the banks of a wild trout stream is barely discernible after decades of neglect.

And it gets so dark out there, the real estate agent pleaded with us to start heading out after the sun started to dip into the horizon…

We agreed, but scheduled another visit next weekend to further tour the property.

Because this place is, without a doubt, an oasis of safety and prosperity.

About 85 acres in total, the land is fertile, the stream is overflowing with brook trout, it’s connected to the grid, and it’s one of the few investments I’m willing to pony up for these days.

Down on the Farm

Aside from a few solid oil and gas plays — and of course a handful of insanely cheap alternative energy stocks — there’s no doubt that in this schizophrenic market, farmland is a good bet.

Theoretically, it’s a nice hedge against inflation. And while it is not liquid, it does lack the volatility that’s sending most investors off the deep end these days.

Of course, as my colleague Nick Hodge pointed out last week, not everyone can go out and buy several acres of farmland. But you can still invest in agriculture through trusts, like the Texas Pacific Land Trust (NYSE: TPL) — or you can also pick up an EFT, like Market Vectors Agriculture (NYSE: MOO), which holds some of the more obvious ag plays like Potash Corp (NYSE: POT) and Archer Daniels Midland (NYSE: ADM).

I also know of some folks in New York who pooled their money back in 2009 to create a company that invests in farmland. These are city guys through and through, so they have managers that run the farms.

These guys aren’t billionaires; they’re not actively turning thousands of acres into industrial operations. But while their condos in New York City and homes in New Jersey continue to lose value, the value of their farms in Pennsylvania and New York have actually increased

And it’s only going to get better.

Meaty Growth

Thanks to a rapidly growing middle class in developing nations, farmland is becoming a lucrative investment.

You see, the ascension of a new middle class has resulted in a growing demand for “richer” diets that require more farmland and more imports.

For example, in India — where a growing population of wealthy Indians is now eating more animal protein — animal feed sales have surged. This is because it can take anywhere between 6 and 16 pounds of grain to get one pound of beef (depending upon production practices).

As India’s protein requirements increase, so too will the demand for animal feed, which in many cases of conventional meat production results in an increased demand for corn.

Interestingly, the USDA announced just last week that world stockpiles of corn could plunge to 117.4 million metric tons at the end of the 2011-2012 season. This would be the lowest level in five years. 


Organic Growth

While populations in developing economies are now starting to enjoy diets rich in meat protein, consumers in the U.S. continue to pour billions into organics.

Back in 2009, analysts were surprised to find that organic food sales grew by 5.1 percent, compared to 1.6 percent in total food sales. The assumption was that organics were seen as specialty items and wouldn’t be able to swim upstream against the backdrop of a recession.

We knew better. We argued that for organic food consumers, organics are not considered luxuries or “specialty items.” And while those who expected the worse for the organic food market and organic food retailer Whole Foods Market (NASDAQ: WFM) in particular, we recommended buying shares of Whole Foods Market.

That was on November 14, 2008, when the stock was trading around $9 a share. Today it trades around $64.00, down a bit from its 52-week high of $73.33 a share.

In 2010, the U.S. organic industry grew at a rate of 7.7 percent, which outpaced the growth of total food sales (hovering around 0.6 percent). Most of this growth came from organic fruits and vegetables, which represented about 40 percent of total organic food value, and about 12 percent of all U.S. fruit and vegetable sales. Organic dairy, valued at about $4 billion, took close to 6 percent of the total U.S. market for dairy products.

Now I know some folks like to mock organics, claiming that they’re not any healthier, nor do they taste any better. And that’s fine if you want to believe that. But as an investor, you’d be foolish to ignore the growth trend.

The expected CAGR for the U.S. organic food industry from 2011 to 2015 is around 14 percent. And organic farmers will continue to benefit.

The farm I’m looking at hasn’t been worked in decades, which means it has been free from the types of pesticides, herbicides, and synthetic fertilizers that are prohibited by the USDA’s organic certification program — a definite plus.

One of the farms owned by my New York friends meets all the requirements for USDA organic certification. Of the three farms they own, this one is the most valuable.

Peace of Mind

Of course, one of the great benefits of farmland is peace of mind.

It’s easy to sit behind our computers in our climate-controlled offices, buy $3.00 cups of coffee at the corner cafe, and drive off to the supermarket anytime we want a pre-cooked rotisserie chicken…

But these are luxuries afforded to us by cheap energy.

When oil hits $300 and your electricity rates quadruple in the next two to three years, you can kiss those days goodbye. I still don’t know how most folks are going to make it. So few can barely get by today.

One thing is certain: You can always provide for you and your family when you have fertile soil, a fresh supply of water, and a little firepower. Throw in some solar panels, a super-efficient wood stove, and maybe a little livestock, and you’re good to go.

For me, there are few things more valuable than peace of mind.

To a new way of life, and a new generation of wealth…

Jeff Siegel Signature 

Jeff Siegel
Editor, Energy and Capital

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