Investing in livestock gives any self-directed IRA investor an alternative investment option from stocks and bonds. Here’s what you need to know if you’re looking into this type of investment.
In this article:
- What Is Livestock Investment for an IRA?
- What Livestock Does the IRS Consider as Investment?
- Other Farm Animals List
- How Does Cattle Investing Work?
- Livestock Investment Prohibitions
- Why Do Some Investors Choose Investing in Livestock?
- When Is Agriculture a Viable IRA Investment?
An IRA Investor’s Guide to Investing in Livestock
What Is Livestock Investment for an IRA?
Investing in livestock in a self-directed IRA involves investing in either cattle or other farm animals. In fact, the IRS considers both as acceptable forms of investment.
While cattle investment is the more common investment vehicle, investors can choose to put their money towards other farm animals as well. This can include poultry, farmed fish, and pigs, which can also function as investment assets.
You can treat any animal as a corporate stock in order to properly account for your financial records.
- The investment cost is the price you pay for purchasing livestock.
- Your distribution or cash inflow is the sale of said livestock or any of its by-products.
As long as the investor reports the number of cattle or farm animals with proper documentation to the custodian, then the self-directed IRA can accept such assets.
Under a self-directed IRA, investors can see two kinds of growth for livestock investment:
- Livestock weight
- Capital gains
Do note that under a self-directed IRA, the IRS considers any asset, like animals, as an investment. There are few, but critical, prohibited assets, so investors should familiarize themselves with what the IRS considers as prohibited investments.
What Livestock Does the IRS Consider as Investment?
Different self-directed IRA custodians have varying ideas on what “livestock investing” is.
- Some consider livestock investing as a catch-all phrase for animal husbandry.
- Others consider cattle as the only livestock investing option.
- There are also those who see animals that aren’t cattle as agricultural investments.
In this post, both cattle and other farm animals are considered as livestock investment.
Cows are the most popular form of livestock investment due to their longer growing period, which is a draw for some investors, and the higher revenue cows can bring in compared to other animals.
It takes around 8 to 9 months for a young calf to mature. Once the calf reaches a certain age and weight, the investor can sell the cow through an auction, to a slaughterhouse, or directly to consumers.
Other Farm Animals List
Farm animals can also be considered valid investments for a self-directed IRA as long as the investor provides the proper documentation. Here are some examples of how to invest in farm animals:
- Lambs — Investors can buy lambs at a cheaper price. These lambs grow into sheep for wool and mutton production, providing investors cash inflow.
- Chickens — Those looking into investing in poultry first have to decide which kind they’d like to put their money in. There are two main types of poultry farming to choose from: layers and broilers.
- Layers refer to chickens that are raised to lay eggs, which are the main selling products.
- Broilers, on the other hand, are chickens that poultry farmers raise for their meat.
Aside from these two, poultry investments may also focus on chicken breeding (incubating eggs and growing hatched chicks), producing poultry feeds, and processing of egg and chicken meat products.
- Horses — The IRS even considers horses, primarily used in breeding and investing, as livestock investments.
- Goats — Many people aren’t aware that while the market for goat meat is small in the United States, it’s a fast-growing market. A big chunk of demand for it comes from ethnic markets. But more than just goat meat, the market for goat cheese and milk continues to expand since more and more people consider goat dairy products to be healthier than cattle dairy products. And more than the meat and dairy products, goats can also provide another source of income for investors: rentals to property owners. One of the biggest challenges owners of large tracks of land face is managing unwanted vegetation. Because goats do nothing but eat vegetation the whole day, they can serve as “organic” lawnmowers that keep unwanted vegetation in properties down.
- Bees – Honey bees can be considered a type of “exotic” livestock investment because not a lot of people farm them. Honey bees can generate income in a couple of ways.
- They can produce honey and beeswax, both of which many consumers consider important. This is especially true for people who frequently suffer from pollen allergies.
- Another way investors can earn from honeybee investments is by renting them to other farmers. Yes, many farmers turn to renting honeybees for their pollination assistance needs.
- Rabbits – The market for rabbit-related products is a growing one, which many small farmers can take advantage of. One of the brisk-selling rabbit-related products is rabbit meat, which is low in calories and full of protein. Small farmers can also harvest rabbits’ pelt or skin, which they can use to make hats, coats, and other crafts. Rabbit manure is also an excellent organic fertilizer, which farmers themselves can use or sell to other organic farmers. And for investors who don’t have the heart to slaughter these warm furry animals, rabbit-breeding is the way to go. Rabbits are very popular household pets and there’s always a demand for them, especially from children.
It’s worth repeating that the IRS allows almost anything that can grow in value as a self-directed IRA investment.
How Does Cattle Investing Work?
The breed that an investor chooses can have a big impact on the profitability and investment strategy of a portfolio.
If an investor is interested in the production of meat, some breeds perform much better than others.
If you’re interested in cattle investing, it’s important to research different cow breeds first. Spend some time reading up on which cow breed can give better returns in specific business models.
- For veal or meat, some breeds, like Angus cows, provide more meat than other cows.
- If an investor wants to optimize milk production, some breeds like the Holstein-Friesian milking cows can supply more dairy than other cows.
Investors interested in meat production also need to know about the cow’s yield grade. This is determined by the amount of lean, edible meat one can get from the cow’s carcass.
The yield grade ranges from USDA 1, 2, 3, 4, and 5. USDA yield 1 produces the most meat while yield 5 produces the least.
There are other essential points to consider when it comes to cattle investing as well. For example, knowing important industry jargon can help.
- Heifers are female cows that have not given birth yet.
- A steer is a male neutered or castrated cow that is bred mainly for its meat.
Investing in cattle entails certain expenses, but if the IRS considers these as part of your investment cost, your profits on paper will decrease, which can mean lower taxes or none at all. As long as the investor records everything, the IRS can consider expenses as part of the investment cost.
Here are some examples of expenses related to cattle investing:
- Feed — One thing to consider is what to feed the cattle. Usually, grass-fed or corn-fed cows receive a premium on their prices.
- Veterinary expenses
- Markings and ID — Investors can ensure they purchased cows from licensed and reputable breeders to receive proper documentation.
Livestock Investment Prohibitions
Before jumping into livestock investments, IRA owners must consider the following prohibitions to avoid incurring penalties:
- An IRA can’t purchase livestock animals that are already under the IRA owner’s name.
- The IRA must house or hold the animals in a different farm from that of the IRA owner’s.
- An IRA owner must not handle or deal with the livestock directly. The IRA owner can only care for and manage livestock through hired butchers, transportation, or farmhands that he or she manages.
- The IRA owner can only take livestock for personal use, such as for personal food consumption, recreational purposes like racing, or any other personal benefit, through distribution from the IRA that owns them directly. A hired farm manager or worker must handle these and the IRA owner must not directly benefit from them.
- Any and all revenues that the livestock investments generate must revert back to the IRA and not the IRA’s owner. Otherwise, those would be considered as distributions from the IRA.
Why Do Some Investors Choose Investing in Livestock?
For thousands of years, even during ancient times, animals have played an important role in the economy.
In fact, the word capital comes from “capitalis,” which is Latin for “of the head.” This is a reference to how cow heads were used as financial asset.
Here are some reasons why investors choose to invest in livestock at present:
- Some investors prefer to see their capital in action, which is why the idea of seeing an investment grow from calf to cow is appealing for some.
- Asset diversification is also one factor that comes into play here, as some investors want to have assets that are not on the stock market.
- Lastly, some investors like the idea of rural retirement, and having livestock can function as a living “piggy bank” with the tax benefits a self-directed IRA has.
The latest Livestock and Poultry: World Markets and Trade October 2018 Report shows great promise for agriculture. Here are some highlights:
- The export of 10 million tons of beef has remained consistent.
- Global beef demand is increasing.
- Pork export increased by 3% for the last quarter and chicken meat by 4%.
- The sheep economy has had a total impact of $5.8 billion as of 2016, which shows good profit margins and a stable market.
When Is Agriculture a Viable IRA Investment?
Real estate can also serve as an investment asset in self-directed IRAs as long as the investor does not use the land for personal or business use.
- If an investor has some farmland in his or her IRA, it can be used as a pasture for farm animals.
- These farm animals can then grow and be considered as a livestock investment for your IRA.
Livestock investing can provide investors a diversified financial and retirement plan. Rather than keep everything in the stock market, investors can see with their own eyes how their capital literally matures and grows.
Of course, livestock investing has its own drawbacks, like the possibility of price crashes for beef or diseases. Before deciding on anything, it’s advisable to consider whether an investment decision aligns with one’s investment philosophy.
Do you think that livestock investing is viable? Do you know other investment assets that most of the public does not know? Let us know in the comments section below.