Sometimes, you shouldn’t invest in your farm.
A lot of times, when commodity prices and incomes are high in agriculture, the return on investment to put your money back into farmland and equipment just isn’t there. All those prices are exaggerated.
There are actually times when you should not invest in your operation, when you should take that excess cash and put it somewhere else, diversifying your income. That’s what we’ll be talking about today: where you should put your money so it’s growing at a better rate than it would in your farm.
The last thing you want to do is buy a $13,000/acre farm, then make $250 a year off of it. You might as well put your money into treasuries that are more liquid than land.
Neighbors of mine have invested in hotels, commercial real estate, restaurants, and international farming operations. I also sat next to a guy who writes deals for large airline companies. I asked him where he puts his money and he said to “long the S&P.”
Try to find investments that give a decent return but have a low risk. Here are three of them.
1) Long the Stock Market
Warren Buffett opens every annual shareholder meeting in Omaha a certain way. He does a movie with famous celebrities and talks about how the U.S. stock market index has performed versus the money managers’ index.
Simply by putting your money in the U.S. stock market in a long position like the Dow-Jones industrial average and reinvesting the dividends, you will outperform the money managers’ index on average. That’s one of the best long-term low-risk strategies.
Obviously, if we’re making new highs in the stock market, you might want to look at other things, but when the stock market has pullbacks, put that money to work in it for sure.
2) Commercial Multifamily Real Estate
The nice thing about real estate is that it’s a tangible asset. A lot of people don’t like stocks and bonds because you can’t go see them. People can make bad decisions at the top of these businesses and really screw up your investment. Real estate isn’t like that.
Real estate also gives you nice passive income, which is usually tax-free because of depreciation expenses and other operating deductions. It’s low-risk; measured upon other asset classes, it’s probably the lowest risk with the highest returns—even better than government bonds, whose interest rates are poor.
Note: To learn about what may be the best type of real estate investment (multifamily housing), grab Paul Moore’s book The Perfect Investment.
3) Municipal Bonds
Municipal bonds are basically state-run projects and financing government programs. The nice thing is that these are tax-free, which makes their risk very low. There have only been a handful of times in history where a municipality has filed for bankruptcy, and it’s usually been in California.
I’ve done municipality bonds, and they’re great. If you can find a 5-6% tax rebond, that’s basically an 8-9% regular bond. They’re a nice way to keep money.
And if you need to close out early, depending on your broker you can sell these back to the market for par value.
Do you understand?
Always invest in things you understand. As farmers, we understand farming and raw land, but it’s not always good to invest in those areas, and you don’t just want the money sitting in a savings account.
In the interim, you can diversify into one of these three, especially if you’ve got kids that probably aren’t going to want to farm. Then you have a better way of dividing up those assets. You have more than just farmland.
Just make sure to do the learning first.
The opinions of the author are not necessarily those of Farm Futures or Penton Agriculture.
Scott is a South Dakota farmer who formerly worked in investment banking on Wall Street. After the commodity markets crashed, Scott took his financial know-how and built a software program for farmers called Cash Cow Farmer, which empowers farmers to master the business side of farming by knowing real-time field-by-field productivity and profitability. Scott consults with farmers all over the United States on risk and financial management, farm strategy and strategic growth. Contact him at firstname.lastname@example.org