A few weeks ago I was interviewed for an article on CNBC.com about investing in farmland. To read that article but none of my blog posts I came across as a cockeyed optimist without a care in the world about this riskless, one-way trade. A lot of context did not make the the article as published. Farm investing via capital markets is not a riskless, one-way trade. There are quite a few considerations to investing in these stocks, specifically the ones I mentioned as they are the ones I try to follow and understand.
One thing I mentioned in the interview, not mentioned in the final article, was that despite part of the story here being the search for assets not correlated to stocks most of the farm stock got pasted during the financial crisis. The theme is perfectly valid. Although kind of muddied I said the demand for better diets is constant which creates a long term tailwind but these things offered no shelter and I don't expect them to offer shelter the next time the stock market has a bear market decline. I have unyielding faith in the theme but not so the equities; if I ever buy one of these for clients it will just be one name probably at a 2% target weight. Note that I have researched several names, they've done well in the last couple of years but am not ready to commit client money here and am not sure when or if I will.
There is also an important thing to understand, or at least appreciate, about the running of these businesses. They are not just massive plots of land that get farmed every year forever. Many of the companies are very transaction oriented, buying and selling land and cattle. Some of these transactions are about growth and some are about strategy and forecasting. A string of getting these decisions wrong will hurt the stock price, or at least that should be the expectation. Another tie in for this topic is the extent to which science plays a role. Decisions get made about using certain land this year then perhaps giving it a year off to replenish, there are also decisions made for various reasons to grow different crops on specific acreage. There is also science involved in yields and attempts to increase efficiency. Oh, and how does one mitigate weather?
The point of the above is to create awareness of the potential complexities in the business and while we might be able to learn about these things buying one of these stocks is a show of faith in the management of the company you select to generally make these decisions correctly.
On a related note a reader has asked twice why I don't like agricultural commodities which doesn't quite capture my thought process. We own MOO for most clients and I've spent a lot of time on these farm stocks so I like the space. From there then we are talking about the best way in. The actual commodities might be the best way in, I prefer equities which may or may not turn out to be the best way to go. I've been very consistent with wanting no more than mid single digits in actual commodities generally preferring the equities in many spaces.
Over long periods of time equities tend to go up despite the occasional bad decade. I am generally more comfortable with companies being able to manage their businesses more efficiently over time leading to more predictable price movement than I think can be counted on with actual commodities. Some exposure serves to help manage the correlation of the portfolio but as I have said before too much exposure to the diversifiers and you end up with a portfolio where equities end up being the hedge which is not where I want to be. I prefer a "normal" equity portfolio hedged with modest exposures to a couple of diversifiers.