Farm Products: Investing Essentials

A field of beans. Source: Flickr user Jimmy Brown

We probably don't think much about the food that's on our tables each night. Sure, we had to remember to pick it up from the grocery store. We might have even given some thought into the recipe used to prepare it. What we don't devote much thought to are the farms that cultivated the food we eat several times a day. The products of these farms are part of a more than $150 billion business that we simply could not live without.

What are farm products?

Farm products are crops and livestock raised on farms. Specifically a crop is any cultivated plant, fungus, or alga that is harvested to be used for food, clothing, or other uses. Meanwhile, livestock refers to animals that are raised for food. Major farm products include corn, cotton, milk, beef, and eggs.

Farm product companies are those that manufacture, market, and distribute goods and supplies to consumers as well as other parts of the agriculture industry. Farm products tend to be sold at local grocery stores or exported overseas. They can also be used as feedstock for other industries; for example, cotton is a feedstock for the clothing industry, and corn is a feedstock to the ethanol industry.

How big is the farm products industry?

Overall, agriculture and related industries contributed $775.8 billion to U.S. GDP in 2012, or 4.8% of the total. Of that amount, $166.9 billion, or 1% of GDP, was from products directly produced from American farms. 

Overall, there are about 2.2 million farms in America, which employ more than 21 million Americans. About 97% of American farms are operated by families; for the most part it's a highly segmented market. That said, investors do have the opportunity to invest directly in the farm products industry, as some farms are owned by publicly traded entities. Further, there are a number of companies that purchase farm products directly from farmers and then distribute those products to consumers under well-known consumer brand names.

How does the farm products industry work?

The farm products industry is involved in the cultivation of crops and livestock and the sale of the associated product. Farm product producers can be as simple as a small farm raising vegetables and selling them on a roadside stand to a multi-national corporation that grows farm products around the world and sells them under a packaged brand.

For investors the industry offers a handful of investment options. There are real estate investment trusts, for example, that own farmland and rent it directly to farmers. At the time of this writing, there were a number of publicly traded farm products producers that focused on one specific farm product. For example, Sanderson Farms (NASDAQ: SAFM  ) is engaged in the production, processing, marketing, and distribution of fresh and frozen chicken products, Cal-Maine Foods (NASDAQ: CALM  ) is a fully integrated egg producer, and Fresh Del Monte Produce (NYSE: FDP  ) is engaged in the production, transportation, distribution, and marketing of fresh and fresh-cut produce.

What drives the farm products industry?

The farm products industry is driven by a combination of economic growth, population growth, population gain like rising to the middle class, and finally the expansion of biofuels. These factors drive the price of farm products, which impacts supply. When the price of farm products are high, farmers tend to plant more, which increases supply and lowers prices.

Each year, the USDA releases its latest agriculture projections, and in 2014, its release looks out to 2023. That projection sees the price of major farm products dropping over the next few years as farmers respond to recent high prices for farm products by increasing production. That being said, it still sees prices for farm products remaining near their historic highs, which should yield cash flow for farmers and investors.

Meanwhile, within the farm products industry is the organic food labeling category. In the U.S. organic food sales in 2012 grew 7.4% over the prior year, which was double the growth rate of all food sales. As the following chart points out, organic food sales continue to climb higher, even if the rate of growth has slowed.

Source. USDA.  

While prices and labels may change, the need for farm products will always be there. We need to eat, and as societies grow, they need to eat more food than ever before. Because of that, the farm products industry will have a steady supply of customers as we all strive to put food on our table each and every day. 

 


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