Farmers receive all kinds of investment offers, from ethanol plants to grower-owned meatpacking operations, overseas farmland or an investment fund for rural startup companies.
“Whether to invest has become an important decision for farmers,” says Don Hofstrand, agricultural economist with the Agricultural Marketing Resource Center at Iowa State University. “The answer depends on your particular situation and priorities.”
“Assess the things a business can control – like the quality of its leaders and the strength of its markets and finances, and have those factors as strong as possible,” Hofstrand says.
He notes, however, that many projects succeed because they are in the right place at the right time, while other very good projects have failed because of timing.
“Before you invest, assess what the business has control over, but from there on, it’s good to have your rabbit’s foot handy,” he suggests.
Here are seven basic questions to ask before making a decision, recommended by Hofstrand:
Q: Should I invest in an outside business or my own operation?
The answer may depend on where you are in your career. Younger growers may benefit more from reinvesting in the farm, while someone later in his career may reap more benefits from an outside investment that diversifies his income.
Q: Can this investment benefit my farm business?
Investment opportunities may offer the promise of creating better markets or new markets for the commodities you produce. Ethanol plants, for example, have increased the corn basis for nearby farmers. These benefits may be as important as the direct financial return of investing, especially for those with a long farming career still ahead of them.
Q: Am I comfortable with this venture’s risk/reward profile?
For every startup venture, weigh the potential rewards against the risk of failure. Low-risk/high-reward investments are the most sought after but also the rarest. High-risk/low-return investments are common but are not a good choice when you’re already in a high-risk industry like farming. Factor the level of risk you can tolerate into your investment decisions.
Q: How much can I afford to lose?
How would it affect your farm operation and family if you lost your total investment? Hofstrand advises growers not to invest more than they can afford to lose and never to rely on an investment to make up for a deficit in the farm business.
Q: Can I sell my shares?
There’s often no organized exchange where an investor can sell his shares in a startup venture. Even if an investor finds a willing buyer and agrees on a price, the transaction may need to be approved by the business in some cases. Is there a mechanism for selling your shares in this investment and how reliable is it?
Q: Can I assess how viable this venture is?
Do more than read the prospectus and disclosure documents. If possible, attend a presentation and make special note of questions to follow up. It may pay to attend several meetings for potential investors to identify useful information you missed the first time. Discuss the pros and cons with knowledgeable friends and neighbors.
For help thinking through the aspects of a potential business, Hofstrand also suggests using the Assessing Business Opportunities material available online by searching for that title at www.agmrc.org.
Q: Does this investment meet my needs?
Commodity-processing ventures typically offer to pay returns indefinitely into the future. In contrast, many business startups are designed to build as quickly as possible so they can be sold for a large one-time payoff. That difference is important if you want a regular income stream to offset unpredictable farm income.
It also helps to be clear whether an investment would diversify your income sources or help reduce (hedge) existing risks. Investing in a livestock operation or ethanol processing can be a hedge against low corn prices, while other investments broaden your income sources without adding to your farm-management tasks.