Emperical
genuinemathsTable of Contents
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Page |
1. Introduction to Agriculture 1.1 History of Agricultural Investments 1.2 Present Scenario
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2-3 |
2. INSIGHT INTO AGRICULTURAL SECTOR
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4-5 |
3. Benefits of investing into Agricultural sector |
6-10 |
4. Types Of Agriculture Funds |
11-31 |
5. How to choose a right fund for you? |
32 |
6. Conclusion |
33 |
7. References |
34 |
1. INTRODUCTION TO AGRICULTURE
In earlier stages of development, humans were primarily hunters and gatherers but as the time passed, we invented farming and rest is history. With the invention of farming, the whole lifestyle of humans changed with it and they became more civilized and organized. Agriculture is not only our need but it also has emerged as one of the foundation pillars of our modern society. It has defined and molded our society and will continue to do so in years to come.
Over the years, many changes have come in the practice of agriculture which has transformed it completely. For example – new tools are being developed on daily basis to produce more yield per hectare, research are going on how to make crops resistant to insects etc. Earlier agriculture was done only for personal purpose but as time changed humans had commercialized this sector.
Now, each farmer aims at developing more and more grain so that he can sell and raise money for himself. Agricultural investments have become vital with this type of business and growth in agricultural industry [1].
1.1 HISTORY OF AGRICULTURAL INVESTMENTS
When farming was started, there was ample of fertile lands available and there was no need of big capital money to complete the process. But over the time, urbanization happened and farmlands were converted into lands to build houses and offices. This conversion put a heavy load on existing agricultural sector.
To cope up with this, fertilizers, machinery like tractors, plougher, irrigation systems like canals etc were used to increase yield and feed the people. The ever increasing number of human population was also a major factor in making agricultural sector the way it is now. With all of these changes, agricultural sector becomes commercialized and it became a good investing option for people.
1.2 PRESENT SCENARIO
With each passing year, population is increasing and arable land is getting lesser, and it is putting an immense pressure on agricultural sector to feed all of the people. Agricultural investments are basically the efforts and capital of a person or organization into agriculture or its related activities. Today, the world population has crossed 6 billion mark already and will continue to grow and every one of us will have to eat which will come directly or indirectly from the crops.
Now you can imagine about the size of agricultural sector and what potential it hold. Agricultural investments can be made in various forms such as the seeds, machinery use to plough fields, fertilizers, land etc and these numbers are growing every day. Agricultural investments provide great capital returns with minimum number of risks [2]. In present, there is no asset that you can possess other than agricultural investment even in a financial crisis because everyone has got to eat somehow and all of that food will come from the farms.
2. INSIGHT INTO AGRICULTURAL SECTOR
Today, the agricultural sector’s main goal is to produce maximum amount of crops and they employ various techniques to achieve it. To feed 7 Billion people properly and also to prepare for emergencies, a lot of pressure is on the countries of the world to do it right. Now they make strategies to perform agricultural investments so that they can feed their population effectively.
With the use of fertilizers and advanced machinery, we are now producing enough food to sustain ourselves and future is also looking good too with the help of sound agricultural investments. Agricultural investments is not limited to just only on the fields it also covers the factories where the machinery like tractors, harvesters are manufactured, fertilizers are produced. All of these components represent Agri Industry and its different sectors.
With strong demand and high returns, agricultural investments are often referred as “Gold with a Coupon”. This phrase aptly suits because the world is changing and more and more middle class families are growing s the world is developing. As people with more purchasing power are growing, their choices of foods are also increasing, now they are moving from a staple diet to more diverse diets such as dairy products, meat products, breads etc.
Meat consumption is also on all time high because of middle class families. For producing 1 Kg of meat, roughly 7Kg of grain and 7 Liter of water are used [3]. We will be crossing 10 Billion mark in 2050 and with the current trends, agricultural industry will be among the biggest profitable of that time. Agricultural investments thus possess a huge opportunity now and also in the future.
There are various ways by which agricultural investments can be made for example – you can own land and produce grain which in turn will reward you with great cash because of subsidies provided by the government, you can also start a farm machinery factory which aids farming etc. Government favors farmers and provides them with several benefits that help them to make more money and produce crops of high yield. Farmers are the ones who provide us food and thus held in high regard by everyone, these factors helps to minimize risks and generate high returns on income.
Moreover crops are not only used for food but also to produce Biofuel which is used to run cars and other vehicles. To reduce dependency on fossil fuels and avoid global farming, biofuel is the most favorite choice of most of the countries. Around 30% of all crops are used to produce Biofuel, thus creating a demand to produce more crops. With such high levels of consumption and varieties of usage
Source: The case for agricultural investments, Project emergence
Source: The case for agricultural investments, Project emergence
Agricultural industry holds lot of potential to grow and for investments. Countries are forming up strategies and inviting people to invest in agricultural sector by giving tax rebates, subsidies etc. Food is one commodity that does not go waste and will never go out of need. Thus, with such low risks and high returns, agricultural investments are the least risky investment that you can make in your lifetime.
3. BENEFITS OF INVESTING INTO AGRICULTURAL SECTOR
The population is growing very fast and the number of middle class people is growing very rapidly in all of this. Middle class section represents those people who have adequate amount of money with them so that they can fulfill their basic needs and afford some luxurious activities at some point of time. With the growing numbers of this section, the number of people also increases which can afford to include delicacies in their diet such as meat products, bread, dairy products and all the processed foods.
With the increasing number of people in such class, people are now spending more on food, not just for filling their stomach but also eating delicacies. By 2050, the population will cross 10 billion mark and that’s a whole lot of people and everyone has to eat so it puts an enormous amount of pressure on the farmers to produce more food so that they can feed the world population adequately. With the addition of more people in medium class, load will increase on meat products.
If we consider meat products, then to produce 1Kg of meat, roughly 7 Kg of grain and 7 Liter of water are required. With changing habits and rise in meat consumption it directly demands an increased production of food. Due to this enormous pressure on economy, agricultural investments have come out as the most important investments in today’s world and this will keep on growing given such circumstances [4].
Agricultural investments are key to our economy as they provide a base for our secure and substantial growth. If proper strategies and policies are made then the agricultural investments can return very high yields with low risks. Agricultural investments can be made in various categories like in machinery, fertilizers department and research section apart from sowing the seeds and ploughing the fields.
There are various benefits of agricultural investments and investors should look for opportunities which yield high returns. Among common benefits of agricultural investments are the variety of services offered, different areas of industries included in the field of farming, low risks on capital investment, high number of consumers and a great potential of growth and research. Other benefits include the possibility of new technologies which can improve the health of crops, cross genetic crops which can grow more than one fruit or grain.
The basic functioning of agricultural investments is quite simple as most of the investments are directly made in forms of funding a farmlands and providing it with machinery and raw materials. Government of countries also makes several schemes and policies for the farmers which make it easier for farmers to buy high quality seeds and apply for loans at much reduced rate than the normal public. All of these subsidies and other benefits provided to farmers make agricultural sector a very profitable sector for the investors.
Source: Daily Sabah Finance
Agricultural sector has gone fully mechanical in developed countries producing high amount of crops which are resistant to insects and other ailments. They produce huge amounts of crops which not only feed their people but also export to countries who are not sufficient enough to mass produce.
Source: Wallpaper craft,
Developing countries like India holds a lot of potential for agricultural investments as they have large farmland but lack the advanced machinery which can make them able to mass produce. There are a lot of opportunities in terms of agricultural investments because there is so much room to do and improve the status. Investors should look for these kinds of opportunities as once developed they can return in high amounts and generally government also produces large amount of rebate especially for the farmers.
Source: Umwelt perspektiven
Overall, agricultural sector is growing to meet the rise in food consumption with the help of advancement in machinery and research. Boom in economic growth and rising urbanization are leading to an increase in demand for higher quantity and wider varieties of foods. If someone is looking for making an investment, agricultural investments are the most preferred choice. Recent studies show that the agricultural investments are gaining popularity among investors and will continue to do so in coming years.
More than 25% of all meat consumption is done in China alone along with already high consumption of meat products such as of beef, pork, and chicken in developed countries. As people are getting more and more rich, they are shifting to meat consumption because of the new foodstuffs that are unlocking due to their high purchasing power. This change in food habits are putting pressure on meat production which is only possible by increasing livestock numbers and to feed such high numbers of livestock, more grains should be produced. In a nutshell, growing population and shift in eating habits directly affects the production of agricultural sector.
Another important of crops is to produce biofuel as discussed earlier. Agricultural investments are increasing because investors can see growth in the usage of bio fuel. Biofuel is used to run our cars and other vehicles and it makes up for cheap and alternative fuel source than the petrol and diesel. We can produce biofuel as much as we want but we can’t produce petrol and diesel as they are nonrenewable resource.
Biofuel addition to the already long list of uses of agricultural sector makes it even more pleasing to the investors. Nearly everyone owns a car now or use public transportation which can run on biofuel in the near future and thus it holds high potential. When an investor looks for the potential in different sectors, then agricultural sector offers most promising high returns and future. Biofuel has also entered aviation industry, marine and even household cooking making it even more lucrative for the investors.
Source: Project Emergence, The case for investments
It is true that arable land is decreasing at an alarming rate as deforestation is happening on a large scale leading to reduced green cover and soil erosion. However, with present technology and loads of research going on in the agricultural sector ensures that we don’t need that much land to produce a substantial amount of crops. With the help of technology, we are able to produce the same amount of crops in one hectare that we did in ten hectare of lands a few decades ago.
This advancement ensures us that despite reduction in arable land we are still able to grow more amount of crops and with help of future technology we will achieve more. However, we still have to maintain green cover and adequate investments can help in retaining those as if substantial amount of money is poured into agricultural sector it can grow much faster and can be seen as profitable investment opportunity by others.
4. TYPES OF AGRICULTURAL INVESTMENT FUNDS
By now, you must have gone a pretty good idea about what agricultural investments is and why are they gaining popularity. There are several kinds of agricultural investments funds that one can invest into and gain benefits. As of 2015, there were over 240 investment funds which specialize in food and agriculture investments and had assets of nearly $45 Billion.
There are several types of options in investment involved in food and agriculture investments like:
· Pension funds – This type of funds are new and are becoming hugely popular in North America and Europe. They are the major source of fresh capital into the agricultural sector as more and more people are planning for their retirement and relying on agricultural funds because of low risk.
· Sovereign health funds – is a state-owned investment fund investing in real and financial assets of agricultural sector. Larger sovereign health funds have launched dedicated strategies to achieve long term investments across food and agriculture sector. Earlier they were targeted only on the farmlands but in recent years, they have shifted their focus on whole sector.
· Equity funds – An equity fund is a fund that invests in stocks and are also known as equity securities. Assets are mainly in the form of stocks, sometimes in a small amount of cash. There has been a growth in sales of packaged and processed food and a drop in the AG machinery.
· Agricultural commodities funds – commodities witnessed a fall in the prices and are facing a tough year as profits are very low. However, coffee and cocoa managed to grow. The quick returns in this fund over long term investments continue to attract investors.
· Private equity funds – are a type of collective investment scheme. They are basically limited partnerships with a fixed term of 10 years. These types of funds are expanding and at present, there are over 40 pension equity funds active right now with net $8 billion in AUM
· Venture capital – it is the money that is provided to fund companies that are starting their business. These funds invest in organizations in return for equity and normally organizations being funded are part of high technology industries such as Biotechnology or IT. Venture capital funds are expanding and are one of the hotspots for investing in the agricultural sector. Land is a scarce resource and search for technological advancements to achieve more yield on small pieces of
· Agriculture trade finance – its main job is to arrange and provide funds to poor families which are involved in agricultural sector so that they can become self-sufficient and earn their livelihood. By doing so, investors are ultimately promoting and creating a section of farmers who use more modern type of tools and fertilizers. This increased use leads to more consumption of machinery, tools and fertilizers and can boost up economy more. This type of funding is increasing as more and more farmers wants to increase their yield and profits [5].
Agriculture acts as a major source of livelihood and income to majority of people in the world. Urbanization has happened but still most of the people are living in rural areas if we take the whole world into context. To change this scenario and boos t up the economy, agricultural investments are vital as they provide sufficient knowledge and tools to the farmers. Our society was started as agricultural oriented and even today we can see that agricultural sector still dominates the land use in the whole world.
So, it is only logical to promote our agricultural practices and make it more advanced to have more food security and to evolve. An agricultural investment helps to achieve this by conducting research and diagnostics, designing new products and formulating new policies, linking different financial institutions to a stable supply chain and encouraging stakeholders into agri-finance.
Investment of about $83 Billion is needed in the agricultural sector of developing countries if we want to feed the 10 Billion population of the world by the year 2050 [6]. This huge number of money may leave us wondering that agricultural sector is not just good enough for investment but the actual case is just the opposite. We are not creating a new branch or field that needs funding and if the funding is provided then will it become successful or not.
Agriculture is one of the oldest professions of the world and it provides us with our most important need – The Food. So there is no question about whether an investment will be successful or not. If an investor is making an investment after studying the market and analyzing the need of the sector, then there lies near zero percent chance of failure. Everyone knows population is growing and it is not going to stop, so what is the best industry to make your investments in than the one which has a direct link with the people.
Private sector investment aims to increase benefit from investments by studying and understanding the growth for food and its products. They also act as a provider of machinery and tools by financing the agricultural research projects. By doing so, they are contributing to the future of whole human race and if they succeed in creating a crop that can solve our problems of present and future, then they are sitting at the top of the heap of solid gold.
Agricultural investments prove to be very effective way of eradicating poverty and strengthening food security. Studies have shown that GDP of agricultural sector is twice as much effective in bringing down the numbers of poor people. In developing countries, farming is a main occupation and around 29% of their GDP and about 65% of their population is involved in this sector [7].
Due to high numbers of labor force and it’s directly impact on the well-being of humans, agricultural sector has always enjoyed an advantage over the other sectors in terms of support and subsidies in taxes by the government. All of these factors makes the agricultural investments least risky and the preferred choice of all among investors.
Mainly there are 4 types of agricultural investment type:
· MUTUAL FUNDS – these are apt for small investors who want to invest their in less risky option. Amount of money is low, liquidity option is fair and above all they are managed by well experienced fund managers. Your money will be funded in the securities of trading companies owned by public in the form of stocks and bonds.
Mutual funds have also a downside to them as they are directly affected by the financial state of market and not by current demographic status. If there is a downfall in the stock market, then your investment will also go down with it.
Mutual funds create investment option for the general public in the companies which functions within the supply chain. The main advantage of mutual funds over all other funds is that you get your own fund manager that guides you through the whole process and helps you in making a smart and informed choice.
The major risk in investing in mutual funds is that if you wish to invest big in then you have to be prepared for big risks too as the whole success ratio of mutual funds depends on how good the stock market is. In simpler words, you are betting your money on companies and fund managers, so it is wise to invest only small amounts as they are very unpredictable [8].
Below are the top 5 companies which provide the option of mutual funds in agricultural sector:
DWS Invest Global Agribusiness Fund
Source: Deustche asset management pdf, March 2016
Allianz Global Agricultural Trends Fund
Source: Allianz global agricultural trends –A- EUR, March 2016
Pictet Agriculture Mutual Fund
Source: Pictet agricultural fund pdf, March 2016
Amundi Global Agriculture Mutual Fund
Source: Amundi agriculture fund sheet pdf, March 2016
Barings Global Agriculture Mutual Fund
Source: Barings global agriculture fundsheet pdf, March 2016
· COMMODITY ETFs
Commodity ETFs are those funds that invest your money in companies which are involved in the production of agriculture products like dairy, grains and livestock. They can either be directed towards many commodities or just one depending upon the market state and investment made.
In simpler terms, these are exchange traded funds and can buy assets like commodities and can make trade of stocks in order to facilitate liquidity option for its investors.
There are two types of it:
1) Those ETFs which possess the physical commodities at the moment like gold ETFs, and
2) Those ETFs which trade future options
Some of the ETFs bear both characters and are great for investment. They generally depend on the trends that are happening in the market or will happen in the future like if some study predicts high consumption of cotton, cocoa in the near future then automatically it will make ETFs value go up of that commodity.
Other factors also affect the value of ETFs such as weather conditions, policies of the region, harvesting techniques etc. Careful study should be done on firsthand on trends in the market or of the future before investing. They can yield high returns in short span of time [9].
Below are the top 5 Commodity ETFs fund companies:
PowerShares DB Agriculture Fund
Source: Powershares DB agricultural Fund Sheets, March 2014
iPath Bloomberg Coffee Subindex Total Return ETN
The index shows the return on the investments made in future contracts of Coffee.
Source: iPathDow-jones coffee subindex total return PDF, March 2013
ELEMENTS Linked to the Rogers International Commodity Index - Agriculture Total Return ETF
Source: ELEMENTS Linked to the Rogers International Commodity Index - Agriculture Total Return ETF PDF, March 2014
The Teucrium Corn Fund
Source: The Teucrium Corn Fund PDF, March 2016
iPath Bloomberg Grains Subindex Total Return ETN
Source: iPath Bloomberg Grains Subindex Total Return ETN, March 2013
· AGRICULTURE ETFs
These funds are basically the same thing as Commodity ETFs the only difference is that they deal in stocks and bonds and not in commodities. When you invest in these funds, you get added advantage as they behave just like mutual funds but with added advantage of quick liquidity options.
The return of the investments made largely depends on the investors will because they choose on which stocks they have to invest. Role of recent trends or market state does not affect these that much. These agricultural EDTFs provide fair exposure but at the same time leave the investors vulnerable to financial crisis.
Agriculture ETFs deals in stocks so they don’t offer investing on future predictions but only on current status of stocks. This limit the amount of returns and benefits may not be as high as others [10].
Below is a list of top 5 companies that manages these kind of funds;
Teucrium Wheat Fund
Source: Teucrium Wheat Fund PDF, March 2016
ETRACS CMCI Food Total Return ETN
Source: ETRACS CMCI Food Total Return ETN Fund Sheet, March 2014
iPath Bloomberg Agriculture Subindex Total Return ETN
Source: iPath Bloomberg Agriculture Subindex Total Return ETN Fund Sheet, March 2013
ETRACS CMCI Agriculture Total Return ETN
Source: ETRACS CMCI Agriculture Total Return ETN Fund Sheet, March 2014
The Teucrium Soybean Fund
Source: The Teucrium Soybean Fund Sheet, March 2016
· AGRICULTURAL FARMLAND
Source: Elana trading, Elana agrocredit to double by 2017
What’s more valuable and expected to return high than the farmlands itself on which the entire agricultural sector stands. Owning an agricultural farmland is the best option for anyone who wishes to stay out of this corporate stocks mess and lead a quiet life. Investing in a farmland offers the best option for anyone as arable land is getting low by every day and people will need arable farmlands to grow food.
This is a long term investment in which you have to make a one big time investment and you can relax after that. There are various options available if one does not want to do farming by himself, he can rent out the farm to another person and in exchange he can demand for money or a portion of crop.
Agricultural farmlands are very valuable and in terms of returns it has outperformed all others, especially if we see long term benefits. Agricultural farmlands have both short span and long term benefits and that’s what makes them so lucrative to investors. If you own a piece of land, you can do farming on it and produce your own crops.
In recent times, there were several news on TV about excessive use of pesticides in the farming to ripe the crops before time or to make them grow bigger artificially, if you grow your own crops you can have all the pure healthy food that you want to eat plus you can sell the excess and make good money. In the near future, if you do not wish to continue farming or a development plan comes along which seizes your land, and then too you get a handsome amount of money from the government as compensation. Agricultural farmlands are quite big and so does their compensation money.
Owning a piece of farmlands has its added advantages and it is a very good investment option. We all know arable land is a limited resource right now and in future the numbers are going to fall even more. In that case, if you invest in a farmlands then your land not only will have high economic value but also you can make a decent livelihood out of it. The potential of farmlands is limitless as they provide everything needed for a good life.
As an investor, you are looking for areas which are in demand right now or will in the near future. Owning a farmland is surely lucrative but it also comes up with some problems of its own which other sectors may not have like weather problems, pest problems, government policies, crop diseases. The health of your crop heavily depends on these factors and in farming one has to give proper attention to crops or else they can get bad pretty quickly.
Also, the farmlands are quite expensive so if you have a small budget then this option is not for you. If by any chance you manage to purchase land, then you have crossed only one hurdle because the cost of operations in a farmland are quite expensive too and demands heavy manual labor.
5. HOW TO CHOOSE A SUITABLE FUND FOR YOU?
The only thing is knowledge about farming and how it all functions when you look for an investment in agricultural sector. Agriculture is wonderful, it provides us with the food we eat and is helping our society by providing jobs and eliminating poverty. Agricultural sector is a very good option for investors and it also offers a wide array of options from which you can choose what is best for you.
Although, there are some points which every investor should keep in his mind while looking for an agricultural investment. Agricultural investments offer wide options and sometimes it becomes very difficult for an investor to choose the right thing. There are some fund which are easily accessible, offers tax wrappers like pension and savings option, some offer high liquidity option but the most important thing to remember is how much do you want to invest and for how long. If you have plenty of money and time, then you can go for long term investments such as owning farmlands which have practically no risks or if you can take risks then you can go for Commodities ETFs which are short term and may provide a handsome amount of return.
Below is a list of some key points which every investor should check before investing:
· Nature of Asset – Personally look into what you are buying and research about it a bit.
· Duration of investment – Ask yourself that if you want to have a long term or short term investment
· Operational costs – Look for any hidden costs or operational costs
· Diversity – what are the different options in a fund
· Investor requirements – Option of liquidity, Money etc.
· Future potential – look for future trends that may happen and buy funds according to those
· Compare – Compare with different fund provider to get the best deals.
6. CONCLUSION
In this paper, we have discussed about how farming came into existence and grew into what we see today. We also studied about the current trends happening in agricultural sector. The main purpose of this paper is to understand the basic essence and importance of agriculture. This paper aims to provide the reader with a detailed yet comprehensive study of the agriculture sector – How it functions, what ere the different parts of it, what is the technology being used, what kind of research are going on in this area.
All of these topics are covered so as when we talk about the investments you can easily understand them and relate to them. Now we know that population is growing and what huge load it will put on our agricultural sectors. By understanding all of these an investor can make an informed choice because he knows about the present state and have a fair idea about what is going to happen in the future.
Since the investor gets a pretty good idea about the whole situation, this knowledge will help him in making smart and better choices which not only will help him but agricultural sector too. If all of the investors and the people involved in the agricultural sector are equipped with knowledge and are on same page, then the growth of sector will go much faster and economy will develop which in turn benefits the investors.
As people are getting more and more rich, their eating habits and lifestyle are also changing which directly impacts the agricultural sector. With new techniques we are producing more than ever and finally in a state of stable economy will small exceptions that will also get eradicated in the near future.
Agricultural sector is growing at an outstanding rate thanks to new tools and research techniques. In the near future, we will become more dependent on agriculture to support our lifestyle and our needs. In that scenario, investors will get the most cream out of all of us as they had made sound decisions timely and in correct sector.
7. REFERENCES
1) History World, Hunter and gatherers
http://www.historyworld.net/wrldhis/PlainTextHistories.asp?historyid=ab63
2) GreenSky India (2013), Current scenario of Indian farmer
https://greenskyindia.wordpress.com/2013/01/01/current-scenario-of-indian-farmers/
3) The case for agricultural investments PDF, Project emergence
4) The case for agricultural investments PDF, Project emergence
5) Valoral Advisors, 2015 Global and agriculture investment outlook PDF, Issue 5, January 2015
6) Valoral Advisors, 2015 Global and agriculture investment outlook PDF, Issue 5, January 2015
7) World Bank, 2007: Issue 3,6
8) David Garner (2nd July 2015) : Agriculture Mutual funds, Top 10 funds in 2015
http://www.dgcassetmanagement.com/agriculture-mutual-funds/2/
9) David Garner (2nd July 2015) : Agriculture Mutual funds, Top 10 funds in 2015
http://www.dgcassetmanagement.com/agriculture-mutual-funds/2/
10) David Garner (2nd July 2015) : Agriculture Mutual funds, Top 10 funds in 2015
http://www.dgcassetmanagement.com/agriculture-mutual-funds/2/