Everybody has to eat. There are carnivores, herbivores, and locavores, but whatever diet a consumer chooses, it will always come at least partly from a farm.
That seemingly perpetual demand can inspire people to investigate agricultural businesses as an investment or entrepreneurial opportunity. And it can be a very profitable sector, but there are a few insiders’ points that would-be investors should understand.
To start off, not every farmer owns a farm, or at least not every acre that he or she farms. While the idyllic picture of the family farm sometimes holds true, the fact is that a large percentage of farmers are actually renting a big portion of the land they tend. There are two main reasons why this is so widespread.
First, the average age of farmers in this country is holding at around 60 years. This includes farmers who make their sole living from the land as well as those who work elsewhere and do farm work during their off time. By that age, many farmers are looking to slow down. Their children are often grown and educated, they may have aging parents to care for, or they may just simply feel like spending some time at the beach. Whatever the reason, some or all of those farms is available for rent to younger operators who can’t afford to buy land yet.
That brings us to the second reason for widespread rental. Flexibility is key in any business. If your manufacturing business has a sudden positive surge, you’re best served not to buy more trucks and hire their drivers. Instead, you will probably want to contract with a trucking company to handle the uptick so that you can cut them loose risk-free when a downturn occurs. Farmers want that same option, which brings us to our next point.
Some agricultural economists say that the cure for high prices is high prices. It sounds strange, but it’s true. When prices go up for commodities, other producers enter the market hoping to cash in. They soon increase the supply and force the price downward, causing them to exit the market. The resulting scarcity drives prices back up, and the cycle continues. This is particularly common in cattle markets. Farmers see a profit opportunity with high beef prices, so they head to the livestock market to re-populate their fields. A few fence repairs with some time spent looking for a New Holland baler for sale and they’re ready to cash in on those expensive steaks.
Another point worth noting is that most agricultural markets are referred to as perfectly competitive. That term means that there are many different operators producing a nearly-identical product, and that any one single producer has no power over the market. Consider a truckload of corn. Is Farmer A’s product any different from Farmer B? Not likely. As such, both A and B take what the going price is.
You can imagine the problems this presents, especially for new farmers. In their beginning years, they really can’t afford to be a part of a bumper crop, because prices are low and they have no other marketing options. A better choice is to find niche markets. These are how they market specialty products that do allow them to differentiate themselves from every other truckload on the road. Foods that are grown organically or to certain religious standards like kosher foods have a narrower market that is willing to pay more. Finding a way to market in this way can greatly increase revenues and durability in the business.
Whether an investor is considering farm operation or simply putting money into an ancillary business, it’s key to realize that the agricultural economy is as complex as any other sector and that there is more to it than the layperson may realize. A deep understanding of how it works is necessary to be successful in any part of the spectrum.