When it comes time for investing, investors need to understand the risks and benefits of farmland assets. Every farm has unique challenges, requiring a diverse use of resources to meet production goals. No matter what an investor's investment goals, farmland assets can be tricky. Farmland assets are broken down into several categories, including row and permanent crops. With an understanding of complexities and nuances, an investor can make a suitable investment to build a healthy portfolio.
Thinking about investing in row crops or permanent crops? The investment team at Land Income can offer some guidance for your portfolio!
The Difference Between Row Crops and Permanent Crops
Crops rotated on an annual basis are known as row crops. Permanent crops are planted to last for several years and have a tax advantage, depreciation which can offset profits.
What Are Row Crops?
According to the USDA, row crops account for more than 75% of all the planted acres in the country. They get their name from the "row" of plants growing in the field. These rows are laid out across the farm’s entire property. The crops are often considered annual foods that are machine planted, irrigated, fertilized, and harvested annually. They are replanted every year.
What Is the Most Profitable Row Crop?
The USDA highlights eight major row crops grown in the United States: wheat, soybeans, corn, sorghum, cotton, rice, oats, and barley. These crops are planted across different geographical areas due to soil type, climate, and market accessibility. Profitability of these crops changes from year to year. Several factors can affect the sale prices: whims of consumers, growing costs, and market prices. All of which go into a farmer's decision to grow these crops in their fields. Specialty crops and organic products can be more profitable than traditional crops.
Pros to Investing in Row Crops
Why should an individual invest in row crops? For one reason, they give plenty of flexibility. Row crops have a low correlation to unpredictable economic cycles. These investments also benefit from inflation. Many of the returns on these investments are connected with commodity futures, which can also be insured. With an investment in a row crop, investors receive stable returns and enjoy long-term land appreciation.
Cons to Investing in Row Crops
On an annual basis, the farmer will decide on the crop to plant for the season. In many cases, the crops are rotated from year to year. For example, corn could be grown for one season, and the following season, soybean, ensuring the soil is not becoming exhausted from one particular crop. However, investors face some cons to investing in row crops. Annual startup costs take away from investment benefits, and there is no guarantee that the harvest will yield a bountiful investment.
What Are Permanent Crops?
Permanent crops are different from row crops. They don't need to be planted, maintained, or harvested on an annual basis. These crops are known as perennials, and they have a lifecycle that can last for many years, in some cases, decades. They are planted and harvested for several years during their lifecycle. Most of these crops are found on vines, shrubs, and trees. Some of the most common permanent crops are nuts, citrus, and fruits. Farmers plant these crops less frequently, but they offer higher returns for those investors.
Pros to Investing in Permanent Crops
There are plenty of pros to investing in a permanent crop. For example, many of these crops will yield a higher cash flow than row crops. Along with that, these crops have an accelerated depreciation value that can be a good thing if an investor needs to tax shelter income. Permanent crops can be grown in only select areas, but the labor costs are low for many of them. These investments should be viewed like owning an apartment building. Yes, investors will have to put some money into the building, but there is a solid cash flow throughout the years.
Cons to Investing in Permanent Crops
Along with the benefits, there are some disadvantages for permanent crops. Many of these crops have a "greenfield" period. That means that it may take several years before the crops can start producing fruits or nuts. Shrubs, trees, and vines need plenty of time to mature to yield those high-quality crops. Investors might not see a return until 3 to 4 years after the trees are planted. Since these are long-term investments, there is no liquidity in the investment. These crops also require a larger investment than row crops.
Which Crop Is the Safer Investment?
For the safest option for an investment, interested individuals need to review the crops' timelines and risk profiles. In general, row crops will give stable returns and offer more flexibility. However, these investments can suffer from operational changes and farm diversification. Permanent crops are the ideal long-term investment, but they carry higher initial costs. Investors might want to look at almond crops. With middle-class consumers seeking out these proteins, they are becoming a sought-after crop for an investment portfolio.
Investing in Row Crops and Permanent Crops is an Excellent Way to Diversify
For those wanting to diversify an investment portfolio, investors need to look at permanent and row crops. These investments are somewhat protected from inflation, especially permanent crops. Plus, these farmland assets are never correlated to bonds or stocks. While investors might need to make an initial investment, they can expect years of profitable growth with these assets.
Are you wanting to diversify your investment portfolio? Make sure to reach out to the investment team at Land Income!
