Investors are always on the lookout for the most efficient and financially sound investment option. New ventures are constantly emerging and making the right decision relies on a lot of patience and industry knowledge. One industry that is piquing the interest of investors all over Australia is the agriculture industry. It’s not something most investors will think of approaching first, but you would be surprised at the results farms have been showing in recent years.
There has been a slow, but steady, rise in the value of various forms of agriculture capital. Most of these farms rely on increasing land and working capital. If you intend to invest in the agriculture industry in Australia, you should know some of the most important factors investors are looking into nowadays.
The business of farming
Every farm business is made up of land and working capital. The returns from each of these assets combine to produce the overall business returns. If your business has the necessary scale and production to create returns for both, then it’s very likely going to end up a profitable venture. Unfortunately, there are many Australian businesses that specialize in agriculture which make no money from their working capital. These businesses often rely on land appreciation for their long-term profits.
There are a lot of options farmers can utilize to give their land tenure a different form. Many land tenure agreements allow the farmer to have an opportunity to grow his business by reducing the production risk that he or she faces. The farmer still gets to generate income and retain ownership of the land. It’s a pretty good deal when you get down to it.
Farm businesses that don’t progress in their business ventures will often end up going under. Small farm businesses might lack the scale necessary to regularly generate profits and increase their size unless they can somehow fund themselves through other methods.
How does it compare to other options?
A large range of asset classes have had their worth reduced in recent times. The current state of the economy further alienates investors from taking any risks with ventures. Surprisingly, agriculture hasn’t been hit as hard as most other markets.
The value of farmland has actually increased and it’s still steadily rising. Cropping farmland has appreciated by roughly eight per cent annually these past few years. When you add the income of actual farms which is usually about two per cent, retention of farmland becomes a very attractive investment.
Due to the recent changes that came with the GFC, there have been quite a few improvements in the agriculture market. Long-term investing reports show that when all dividends are reinvested, net profit before taxes is still in the clear. Another group of recent data points to balanced managed super funds being a viable option. They often return show returns of up to five to six per cent.
Most useful applications
When it comes to proper investments in the farming industry, a contract farming agreement might be the top tier choice you can make. Australian firms have used these contracts as their premier choice in investments. Some of the most common areas they have been applied are the dairy industry and meat processing.
It’s a relatively new concept that quickly spread amongst investors and businesses alike. It’s been shown to be a great alternative to land leasing for a variety of reasons. It allows businesses to expand their farm business and increase the scale of production. If an investor is interested in participating in agriculture, in this system they are welcomed with a very effective structural element.
Land ownership comes with quite a few tax advantages, this includes tax returns. Businesses are projected to save quite a bit of profit if their accounting is sound, which is why a lot of them turn to experienced LLB Accountants for help. If you have existing holdings already, you won’t be obligated to purchase new land in order to create a new farming enterprise.
The system isn’t very expensive or difficult to operate. The administrative job is a relative breeze compared to other kinds of contracts. Your new enterprise can focus on the intricate details of increasing working capital instead of the capital costs of purchasing land.
Farm assets
The return from farming isn’t made the same way as it is in other investments. You won’t be creating a lot of products or creating a ton of value on the stock market, but it has more than its fair share of advantages. Most of the return in the agriculture industry is created from the return of land assets that appreciate in value. The value of working capital also steadily increases alongside it. These factors have very interesting interactions with fluctuations in the overall market.
When interest rates are particularly low, you should expect land values to rise by quite a bit. Commodity prices affect land values as well, when they’re high, you should expect land values to follow in their steps.
The one thing farm assets have in common with every other kind of asset is fluctuation. You can expect farmland to have periods of stagnation and periods of growth. However, it’s not exactly an unpredictable asset when you look at the big picture. The overall trend is still fairly consistent and there is always a rise in median values. So far, farm assets have proven to be a pretty good investment option.
Conclusion
Picking the right investment option is always going to be a difficult decision. Luckily, the market sometimes gives you a couple of hints for where to look. Many investors will set their sights for agriculture this year and they’re not doing it without the necessary research to back them up. When you invest in agriculture, you’re investing in a lot more than just the products that come from it. You’re investing in the value of the fertile land and the potential business it can generate. There are a lot of factors to consider here, so make sure you do all the necessary research before treading into this market.
