Many farmers consider their farm to be their sole investment, retirement plan and income, ignoring the risks and potential dangers of placing all their eggs in one basket. In fact, Old Mutual’s research indicates that only 19% of farmers invest outside the farming operation, and only 35% of farmers own property other than their farm.
With increasing urbanisation removing arable land from production, persistent droughts in large parts of the country and a growing shift towards organic products and free-range farming – which requires more land – the challenges facing farmers who rely solely on their farms will continue to grow.
Add to this realities such as climate change and uncertainty about the security of title deeds and land ownership, and the priority for farmers to revisit their business and investment strategy goes up a notch.
Diversify your portfolio
It’s time to think differently about the future and the security linked to agricultural land. Research shows that 95% of farmers have no investment in assets outside the South African economy, although it is fairly easy to build up an investment portfolio considering the current exemptions of R10 million per year per person.
As a farmer you should look at the risks associated with your farming operation and ensure that your financial portfolio includes assets outside the farming operation that can support your lifestyle independently of the farm.
Many farmers believe their farms are their single most reliable investment and may argue that investing in their operation yields better returns in the long run. As a result, many farmers plough back most of their capital into the farming operation. However, diversifying your risk by investing outside your farm, especially in investments that can safeguard your lifestyle during retirement, is a sound business principle that you should consider.
Diversifying your portfolio will also help when it comes to succession planning, enabling you to leave the farming operation, perhaps when you retire, without having to rely on income from the farming operation of the incoming generation or new owners.
When it comes to using an investment portfolio as a diversification mechanism, there’s no one size fits all. Every farmer’s risk profile should be considered when composing an investment portfolio, and the risk and taxation aspects of each investment option must be assessed.
The lower the risk, the lower the potential return, hence better returns can be expected from a diversified portfolio over the longer term because of exposure to more risky investments such as shares, rather than no-risk, interest-bearing investments.
The way in which investment portfolios are structured determines how tax efficient they will be and could make a significant difference in the eventual return. Offshore investments could be especially tricky with tax compliance issues from an income tax, capital gains tax and potential estate duty perspective.
A balanced agri portfolio
Old Mutual recently launched the Global Food & Agri Portfolio via Old Mutual Wealth’s Private Client Securities (PCS). PCS manages share portfolios for individuals and businesses using model share portfolios or structuring and managing bespoke solutions for its customers. The new Agri Portfolio is designed for investors who believe in the long-term prospects of the agricultural value chain and have an appetite for investing globally.
The portfolio is a diversifying mechanism that allows for investment in a balanced agri portfolio, with access to the growth potential of some of the biggest listed companies geared to benefit from a growing global demand for food and increased production with limited resources.
The Old Mutual PCS Global Food & Agri Portfolio invests in carefully selected international companies that focus on farmland, applied research and technology, transport, and agricultural inputs such as equipment and fertilisers.
Old Mutual Life Assurance Company (SA) Limited is a licensed financial services provider.