How and Why of Agriculture Investing

Agriculture. It’s a field of investment that I see my pals underestimate. I’m writing this article to share with you why you should invest in agriculture, and specifically how you can invest in it (for Indonesia). There are several reasons that agriculture is a good sector to be in, which are:

Indonesia, in it’s core is an agricultural country

For Indonesians, since primary school, it has been iterated to us time and time again that Indonesia is an agricultural country (negara agraris). And this is still true, as 14% of Indonesia’s GDP is made out of agriculture, forestry, and fisheries (BPS, 2015). The whole industry is supported by a staggering growth of population, currently, there are about 250 million people in Indonesia, and is projected to grow to more than 300 million by 2035 (BPS, 2014).

Strong government support

Jokowi’s government is certainly not neglecting to take care of the industry, as it’s one of our president’s core program (Nawacita program), which are

“Realizing economic self sustainability by moving domestic economically strategic sectors”

This part of the president’s program includes agriculture, and is continously iterated since 2014 when President Jokowi took office. The initiatives are now starting to bear results, as 2016 saw the highest paddy production in the past 10 years, and agriculture minister has been able to stop rice imports which typically happens in September and October.

Industry is backed by primary needs

The simplest way to explain this is that you see economy going up and down, but people still needs to eat. People might go for less expensive options, but in the end everyone has to eat.

Low correlation with other sectors

Agriculture in general has low correlation with other sectors such as finance, consumer, trading, basic industry, property, mining. This means we can diversify our investment from other stocks, bonds, and financial instruments. Low correlation to other sectors means even if other sectors are falling, it has a low impact to the agriculture sector in general, and can help protect us from risks in other sectors. Imagine if all your investments are highly correlated, if one falls, all of them will fall, and this can be disastrous to investors.

And I’d like to cover a few things I often hear, with comments:

“There’s too many mafias and cartels in the agriculture business, it’s dangerous to do business!”

Most of these claims are unsubstantiated, and is designed to discourage newcomers into the sector. Sure there are middlemen (tengkulak) in a lot of villages, but they exist because there’s a need for them. Farmers often needs financing and traditional financing instruments from banks and financing companies are unable to accomodate them, this causes them to need to rely on informal sectors, which is perfectly accomodated with middlemen. This middlemen then gets the rights to the farmer’s crops with cheap price. And with a long value chain before the harvest crops arrive in cities, price is driven higher and higher for consumers, and lower and lower for farmers. For example, for rice to come from Sukabumi’s farmers to Jakarta’s consumers, it passes through 7 hands on average. This leads to the second comment of

“Agriculture has low margins”

Because of the long value chain from farmers to consumers and the many parties taking profit from the process, the margin is usually low for 1 party. But if you can cut the length of the value chain, say from 7 to 2 or 3, then the share of the pie is much bigger.

Imagine you have a pizza and you share it with 7 other people, each of you will get 1/8 of the pizza. But if you share it with only 3 people, then you will get 1/4 of the pizza.

Golden melon for example, can be extremely profitable with over 100% margin in several cases as mentioned here and here.

The key is selecting the commodity, and ensuring you have a good market to sell the harvest results to.

“Rate of crop failure is too high!”

This view is often caused by media oversensationalization in headlines. For example this news from 2015:

Crop failure land is more than 25,000 hectare

Man, that sounds scary right? 25,000 hectares feels like a huge amount of land. But if we look closer, and we see the data, the area of land that has harvested is 10,640,000 hectare. And that’s 76% of total farming area, which is up to 14,000,000 hectares. In light of these numbers, 25,000 hectares is 0.179% of the total farming area, and 0.235% of the farming area that has been harvested. I say 0.235% rate of crop failure is not bad at all!

Let’s compare this number with the rate of business failures, unfortunately as we don’t have data for the rate of failure of small medium business in Indonesia, I’ll be comparing this to the US rate. According to the Small Business Administration (SBA), 69% of firms survived at least 2 years, which means 31% fails in their first 2 years. This rate is much higher than the rate of failure of crops!

And the situation is even better, with insurance industry covering crop failures. In 2016, there were 103,030 hectares of land insured. This will serve as even more protection to crop failure.

The How

Now I hope at least you’re open to the idea and slightly interested in investing in agriculture! There are several ways in which you can invest in agriculture, which are:

Farm Real Estate Investment Trust(REIT)

This is an option in the United States, but not in Indonesia. A REIT, or Real Estate Investment Trust, is a company that owns or finances income-producing real estate. To invest in REIT is basically investing in a company that deals business in real estate and receive the proceeds from their profit. For example, the only REIT in Indonesia as of the moment of this writing is Lippo’s REIT which deals in office space and buildings. Most of the rental income that they receive should be distributed as dividend to investors

Stocks

There are a few stocks of agricultural companies in the Jakarta Stock Exchange, but the catch is, most of them deals in palm oil.

Mutual Fund / Reksadana

As far as I know, there are no mutual funds that specifically invest in agriculture, all mutual funds invest in a diversified portfolio which may/may not include agriculture.

Commodities Market

In Indonesia, as with stock market, the commodities market (ICDX) only accomodates crude palm oil and palm olein.

Futures Market

In JFX, there are a bit more options, which are Tea, Coal, Cacao, Arabic Coffee, Robusta Coffee, rubber tree, and Palm Oil.

Owning your own farm

I can hear all of you saying “duh” now. Yes, owning your own farm is always a choice! Obviously, this requires the biggest capital and effort out of all the choices here. I know several of my colleagues in Microsoft Indonesia who owns farms. But there are several factors you need to understand before you own your own farm, which are human (labour, market, finance, tradition, political), and physical (climate, relief, soils, aspect) factors.

Crowdlending

The last option is also the newest. Through P2P Lending/Crowdlending/Crowdfunding, however you want to call it, you can fund farmers directly and get profit from their farms. Here you are able to choose what kind of commodities you want to invest in, where the farm is, and diversify easily. Firms that accomodate specifically this in Indonesia at the moment is TaniFund, iGrow, and Crowde. All of them has their own focuses and caters to a different subset of people.

After reading this article, I hope 2 things are clear for you:
1. Investing in agriculture can be profitable and is just or even less dangerous than investing in businesses
2. There are a number of ways you can invest in agriculture, but in Indonesia, you’re limited to stocks, commodities market, futures market, owning your own farm, or crowdlending.

Disclaimer: At the time of this writing, author is working as the VP of Investment of TaniFund.com, a crowdlending platform to help investors grow money while helping farmers in Indonesia. This article is done by author in his personal capacity. The opinions expressed in this article are the author’s own and do not reflect the view, position, or opinion of TaniFund.

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