Renk Agribusiness Institute

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Off-Farm Investing

• T. Randall Fortenbery
• Director, Renk Agribusiness Institute
• UW-Madison
• Presented by Bruce Jones
• Investing in Agriculture
• December 14, 2006

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• Investing is often a struggle between clear,
  sound objectives and emotion. The challenge is
  to be excited about the risk involved, but not
  let emotion cloud the evaluation of the
  risk/reward profile.

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Key to Successful Investing

• Clearly identify your objectives.
• Identify your planning horizon.
• Clearly and objectively assess the likelihood of
  failure/probability of success.
• Be able to survive an investment failure.
• Understand the tax implications of your
  investment strategy.

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Identifying Your Objectives

• Make Money on Every Investment.
• At what rate of minimum acceptable return?
• Make a modest return on some investments, and
  make some high risk investments looking for a
  home run but willing to fail.
• Find investments that utilize my farm production
  as inputs.
• Find investments whose expected returns are
  inversely related to my farm returns.
• Make investments in locally sited businesses.

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Identify Your Planning Horizon

• Retirement.
• College Fund.
• Next Years Vacation.
• Money Turn-over Rate

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Clearly and objectively assess the likelihood of
failure

• The more exciting an investment opportunity
  seems, the more difficult it is to objectively
  assess the potential downside.
• Be sure the upside justifies exposure to the
  downside (is the risk/reward profile balanced).
• VERY critically evaluate the business plan of a
  new venture
• Have they clearly identified those elements that
  could lead to failure?
• Have they clearly identified their competition,
  including the elements that make it likely they
  can compete?
• Is there a clearly defined exit strategy (for
  both you and the company)?
• Can the company make it without your investment?

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Clearly and objectively assess the likelihood of
failure, cont.

• Are the financials complete?
• Be prepared to seek outside assistance if
  necessary.
• Is there a large, previously successful investor
  involved?
• Is the company producing a commodity or a unique
  product?
• Does the company posses IP (patents, etc.) that
  are well protected?
• Is success dependent on public policy?

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Be able to survive an investment failure

• Understanding your ability to absorb risk is
  critical to investing.
• Two types of risk tolerance
• Financial are you in a financial position to
  absorb the outcome of a risky investment without
  risking your primary business and/or family
  needs?
• Do you have the emotional tolerance to absorb the
  realization of a risky event?
• Is this investment so closely related to other
  investments that its failure will impact the
  performance of other investments?

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Understand the tax implications of your
investment strategy

• This may require seeking expert advice.
• The same identical investment by two different
  individuals will have different tax implications
  for those individuals.
• EVEN IF YOU SEEK PROFESSIONAL TAX ADVICE
  UNDERSTAND YOUR TAX SITUATION AND WHY THE
  RECOMMEDATIONS MADE MAKE SENSE FOR YOUR SITUATION.

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Farm Land Sales and Section 1031 Tax
TreatmentPaying Premiums For Farm Land In Order
To Avoid Income Taxes On Capital Gains May Or May
Not Make Financial Sense for you.
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Summary

• Avoid making investments because of a hunch or
  because your neighbor made a recommendation.
• Do not make emotional investments (i.e., this
  business will save the environment, revitalize
  the town, etc.).
• Demand documentation for all claims.
• Understand how and when you can liquidate your
  investment.
• If you do not understand a business
  plan/technology/financial projection - SEEK
  PROFESSIONAL GUIDANCE.
• If you feel you cannot afford professional
  guidance, then the investment is not right for
  you.