Farm On The Stock Market And Increase Your Profits

An extraction of an article by Glenneis Kriel in Farmers Weekly November 7, 2018

While food and agricultural stocks are often overlooked as investments, many companies offering these products represent excellent value for money. Glenneis Kriel asked a number of investment officers about the opportunities available, and what advice they had for would-be investors.

Traditionally, agricultural and food companies have been treated as the stepchildren of the stock market.

Today, however, global supply constraints, combined with rising demand for food and technological developments, have turned many of these companies into attractive components of a well-diversified investment portfolio.

Hedge your risks

While the agri and food sector offers good investor opportunities, David Lerche of Sanlam Private Wealth warns that investments should not be made blindly.

“Farmers should ideally have a well-diversified investment portfolio that allows them to reduce their agricultural production-related risks. For example, if you’re a dryland grain farmer, you should ideally not invest in a company that’s vulnerable to grain price fluctuations and climatic risks. It also makes sense to invest in companies that help reduce the seasonality of farm earnings,” he says.

Nicolaas Hanekom, private client equity manager at Heimker Investing, says agricultural stocks could also be bought to expand a farming business.

“Farmers usually try to increase scale through upward or downward integration into the supply chain, but they don’t have to do this by physically starting a new operation. An alternative would be to buy stocks in companies that specialise in these operations, which carries a much lower risk than having to run one yourself,” he says.

He explains that listed investments are liquid assets that can be sold easily and be offered as security for loans, whereas an on-farm factory does not add value to the farm, cannot be sold separately, and will not be accepted as security by the bank if it falls under the farm’s title deed.

“When comparing investment opportunities with farming, consider the risks as well as the potential for capital appreciation. A local company in the food sector of the JSE is exposed to movements in the currency, as well as movements in the price of agricultural commodities. Farmers are exposed to the same factors, but a listed company such as AVI or Pioneer Foods enjoys the advantage of pricing power. They’re price-makers to a certain extent, whereas farmers are price-takers.”

These companies also generally offer better growth.

“The value of agricultural land in the Western Cape’s wheat-producing areas has increased by 1 700% since 1998, whereas AVI shares have risen by 7 100%, and John Deere shares on the NYSE by 1 840% in rand terms over the same period,” Hanekom says.

He adds that an investment in listed property is psychologically easier for a farmer when he starts a share portfolio.

“With his total investment in agricultural property, the shift to listed property is a relatively easy step to take. From that position, his investment philosophy should evolve to the point where he simply invests in the listed opportunities that offer the most value or the best chance for capital appreciation.”

Use an expert

A farmer should nevertheless use a reputable trader when investing on the stock market.

“Farming has become a highly specialised field. The same applies to the investment market. It takes years of training, skills and knowledge to become a good portfolio manager. You can lose a great deal of money if you make the wrong decisions, so rather pay a professional to do it,” Lerche says.

Hanekom advises farmers to select a portfolio manager in the same way they would select a farm manager.

“When selecting a farm manager, the owner uses criteria such as education, experience, record of accomplishment, communication skills, professionalism, and a proven system and plan to add value to the farm.

“The financial regulations ensure that the portfolio manager cannot ‘walk away’ with the capital, in the same way that the farm manager is not able to steal the farm. There are big differences in investment style and results between portfolio managers, so the choice of fund manager is the most important step.”

Read the full article in link below https://www.farmersweekly.co.za/agri-business/farm-stock-market-increase-profits/

Email Nicolaas Hanekom at nicolaas.hanekom@gmail.com