Kub's Den

Diversification in Ag Markets: Personal Strategies Venture Beyond Commodities

Elaine Kub
By  Elaine Kub , Contributing Analyst
Two-thirds of poll respondents claimed some sort of investment in the stock market. (DTN graphic by Elaine Kub)

I have been known to preach entire hour-long seminars on the financial benefits of diversification to conference rooms full of agricultural producers. Granted, once I started in on the portfolio optimization case studies and matrix algebra, I would notice the seed caps start to point downward and nod over the sounds of gentle snoring, but I would console myself that at least the attendees were able to rest their feet after a long morning walking through equipment displays. So, okay, I could have shortened things up a bit.

It's not a difficult concept: Don't put your eggs all in one basket. Various types of eggs stored in various types of baskets reduce the risk of breaking all of them at once.

In ag market terms, this means that a farming operation in North Dakota, for instance, growing corn, soybeans, wheat, canola, sunflowers, lentils and field peas (seven commodities that prices aren't entirely correlated to each other) may expect less volatility in its overall income stream from year to year than a farming operation in Iowa that grows only corn and soybeans (two commodities that prices tend to move up or down together).

Similarly, someone who produces both grain and livestock may not face the same overall boom-or-bust risk of someone who produces only one or the other. Meanwhile, a Midwestern producer that is pretty much stuck with a corn-and-soybeans rotation can still incorporate some diversification benefits by spreading risk across multiple geographic locations, multiple marketing time frames or multiple production practices, etc.

When looking at this issue from a farming perspective, but also a family income or a personal wealth portfolio perspective, the ultimate volatility vanquisher tends to be off-farm income. To truly remove the boom-or-bust threat of relying on fickle grain prices, many producers have strategically ensured they have some portion of their household income coming in independently from the farm, and perhaps from something that has nothing to do with farming at all. A dentist's income is less correlated to the price of corn than a farm equipment dealer's income.

Therefore, I was extremely interested in the results from a recent informal online poll posted on DTN/Progressive Farmer. It asked readers, mostly agricultural producers and ag industry professionals, "Do you invest in the stock market?"

Now, I've always held an idea in my head that farmers seemed less likely than the average population to invest in the stock market -- maybe just because I've witnessed enough of them build entire retirement strategies based on buying land (and only land), then renting those assets out once they retire. There is wisdom behind that strategy -- as Mark Twain said, "Buy land; they're not making it anymore." And while any company could go bankrupt, and therefore an investment in any company (whether a private venture, a publicly traded stock or a corporate bond) could eventually be worth zero dollars, farm land is presumably never going to be worth zero dollars.

However, the stock market (using the S&P 500 Index as a proxy) has returned 14% this year so far. Let's compare that investment to farming as a use of capital: If it took $3.23 of investment (cost of production) to grow each bushel of corn, using baseline Iowa State University figures in this example, and every bushel was sold at harvest for $3.78 (the DTN National Corn Index or nationwide average cash price on Oct. 15, 2020), then we could say that corn farming returned 17%, pre-tax, in 2020. Similar back-of-the-envelope calculations show that soybean farming returned 15% this year ($8.72 cost of production and $10.06 mid-October sales price).

Those are pretty comparable investments.

But we all know that farming returns are not so predictable from one year to the next. Neither are stock market returns, but the beauty of portfolio diversification means that an investor who has her fingers in many pies (commodity production returns as well as stock market returns, bond returns, real estate returns and returns from other business investments) won't be entirely wiped out by a single bad year in any one of those "pies."

Of course, this is a moot point for many beginning farmers and others who aren't in a position to be allocating capital investments anywhere. But there are plenty of agricultural producers who do have capital they can choose to send in whatever direction they deem wise. Every time I hear about a hedge fund (primarily a stock market investment vehicle) that's diversifying into farmland or commodity production, I always wonder: Why don't more farmers (primarily commodity producers and landowners) diversify into stock investments?

Well, as it turns out -- many do. The results of the DTN/Progressive Farmer poll question, "Do you invest in the stock market?" showed the following answers:

Forty percent said, "I do, through a 401k/IRA of my own or my spouse."

Twenty-six percent said, "I do, but I like to choose the stocks, mutual funds, etc. that fit my viewpoint."

versus

Sixteen percent that said, "I do not, I prefer to put extra capital into my business."

And 18% that said, "I do not, I prefer to invest in land."

That's a clear majority of respondents -- 66% -- who do have some exposure to the stock market, whether in a formal retirement plan or in a self-directed retail account, thereby diversifying their investment base.

There are caveats, of course, with any online poll -- mainly that the respondents aren't randomly selected and DTN/Progressive Farmer poll responders aren't tracked or controlled to statistically show whether one segment of the population is more likely to answer one way than another. The responders may not all be farmers -- trust me, from the feedback I get in my email inbox, DTN/Progressive Farmer readers come from all over!

The people who clicked on this poll question are a self-selecting bunch -- people who happen to be reading DTN/Progressive Farmer and who are willing to share their answer. And although this question isn't worded to make any one answer sound more virtuous than any other answer, I can imagine that the willing respondents to this question might be skewed toward the type of people who are already interested in stock market investment and proud of their investment activity.

It may not be a full and true picture of the farming population as a whole, but it's nevertheless an interesting peek into the investment diversification practices of the agricultural community. I'm definitely not in a position to say that one strategy is better than any other strategy. I can picture farming operations whose bankers would much prefer they direct extra capital into their business instead of a stock-picking account. I can also picture ag bankers who would advise their clients to save regularly into a retirement account invested in the stock market. Individual circumstances vary.

In any case, perhaps you, dear reader, are feeling as nostalgic as I am for the past when we would unflinchingly pack together face-to-face for conferences and winter farm shows and market outlook meetings. I want to assure you that when those times return, I will have learned my lesson and won't need to bore you with matrix algebra just to prove this simple point: Don't put all your eggs in one basket!

Elaine Kub is the author of "Mastering the Grain Markets: How Profits Are Really Made" and can be reached at masteringthegrainmarkets@gmail.com or on Twitter @elainekub.

Elaine Kub