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Page added on July 3, 2014
Harvest the fruits of the land
The growing world population and potential return from crops has made farmland very attractive
Farmland as an investment has traditionally been the preserve of wealthy families, more recently attracting interest from institutional investors and pension funds as they look to income producing real assets that can match their liabilities. Supply and demand is shifting and this is an opportunity for strong long-term returns. Increased interest has brought opportunities for retail investors, but is this a suitable asset class?
The world’s population is predicted to reach 9.1 billion by 2050 – a 34 per cent rise – with growth driven by developing countries. To feed this population, the UN Food and Agriculture Organisation estimates that food production must increase by 70 per cent.
Soft commodity prices have risen substantially in recent years and are forecast to continue increasing. The spike in global crop prices in 2007/08 and subsequent volatility in food prices has reminded a number of developed, import-led countries about their food insecurity – this has prompted major investment into farmland.
Energy can also play a role in the value of farmland. Government initiatives and global awareness of climate change has increased demand to provide more energy from renewable and sustainable sources. Farmland can be used for solar and wind farms, as well as bio-fuel crops, which are more controversial as large tracts of land are no longer available for food production.
The increase in the capital value of farmland is the main driver behind performance. Savills Global Farmland Index has calculated average annualised growth of 20 per cent in farmland values since 2002. The highest growth rates were recorded in emerging markets such as Brazil, Hungary and Romania.
Farmland investors are usually looking to capture three key benefits:
1. Diversification: Farmland has historically had a low or sometimes negative correlation to traditional asset classes. The global nature of farmland and opportunities available can provide investors with several options when looking to diversify their investment portfolio.
2. Capital preservation and inflation hedging: Performance is often driven by capital appreciation in the value of the land. Farmland has a positive correlation to inflation and can provide a long-term solution for capital preservation.
3. Returns: Farmland over the medium-to-long-term can provide returns from capital growth in the value of the land as well as annual harvest income.
Investors also have considerations, namely:
1. Complex Global Industry: Farmland opportunities are available across the world. Developing countries will have cheaper land and labour and investments may offer higher returns, but the risks could be higher.
2. Liquidity: Farmland is a medium-to-long-term investment. Although prices are not usually volatile, substantial returns can be difficult to realise over the short-term. The re-sale market in developed countries such as the US and UK is well established, but investors considering developing countries must ensure they pay a fair value for the land and be flexible when it comes to selling.
3. Current Commodity Markets: Market prices for crops are dependent on global supply and demand. Climatic events (drought, floods, hurricanes) have the biggest impact on supply and farmers will often diversify what they grow to mitigate this.
Retail investors considering farmland have a number of investment options. Exposure to grain prices can be achieved through investing in commodities, futures, options or listed funds. Mainstream investments provide liquidity, low minimum investment levels and low transaction costs. However, these investments are more closely correlated with mainstream assets and provide less diversification.
Direct ownership of farmland will come with high capital requirements and low liquidity, but can offer strong consistent returns. Investors must take into account tax benefits; the number of harvests that can be achieved; climatic conditions; the cost and availability of inputs; local and national infrastructure and whether the country has an established agricultural sector.
Unregulated collective investment schemes can provide diversification from holding a range of underlying assets, and investors benefit from the experience of the investment manager. But these are restricted to high net worth and sophisticated investors only.
Investors wanting direct access to this sector must take on higher risks and tie up large amounts of capital over the medium-to-long-term, by investing directly into land or through an unregulated investment.
12 Comments on "Harvest the fruits of the land"
Plantagenet on Thu, 3rd Jul 2014 5:08 pm
Land ownership has always been an important contributor to building wealth. In the US the development of a middle class led to widespread home and farm ownerhip. Unfortunately, in the new economy young people can’t find good paying jobs and so most young people today will never be able to afford a home or a family farm.
MSN Fanboy on Thu, 3rd Jul 2014 5:47 pm
Because of Obama….
Makati1 on Thu, 3rd Jul 2014 8:45 pm
Usable farmland in the US (and probably the UK) is too expensive to buy for anyone but the wealthy elite. Then, to farm say even 50 acres, you need oil burning machines (unless you farm Amish style, but then you need a large pasture for the horses/mules) or slaves. If you have a ‘truck farm’ of maybe 10 acres or less, you might manage manually, with some family help.
This is an ad for investing, not a real discussion of food or it’s problems. In most countries, if you think you own land, just try not paying the taxes on it for a few years, or miss your mortgage payments if you bought it. You will quickly find out that you can never own it outright without a fear of loss. Therefore, personal ownership is impossible. You can be a long term ‘renter’ at best. A Serf that believes he/she is a middle class land owner.
Northwest Resident on Thu, 3rd Jul 2014 8:57 pm
Nice conversation you’re having there between your right and left hand sock puppets, Nony. Take your meds bro.
Fortunately, you don’t need 50 acres or even one acre to be able to feed yourself and your family. Just one quarter acre, if done right, will enable a family to feed itself adequately. But the problem is, doing it right requires the right seed, the right knowledge, strong muscles and back, knowing how to preserve the food you grow, and the right materials to get it all up and running.
For reference, read Mini-Farming: Self-sufficiency on 1/4 acre — just search for it and you’ll find plenty of links.
GregT on Thu, 3rd Jul 2014 9:24 pm
NWR,
I suspected the same quite some time ago. One severely deranged individual.
In regards to farming; community is also paramount. No man is an island.
PrestonSturges on Thu, 3rd Jul 2014 9:48 pm
There is still plenty of farm land out there at foreclosure prices. We have several hundred acres of rich bottom land a half mile from the river, 6′ above the water table, and on a county highway. We will probably end up more or less giving it away. We might sell it to the local sportsmans club for $1.
R1verat on Thu, 3rd Jul 2014 11:51 pm
PS Must ask why you are ‘giving’ this land away?
Makati1 on Fri, 4th Jul 2014 8:25 pm
PS, no one sane gives away hundreds of acres of good farmland. There has to be a huge negative there somewhere. Is it next to a chemical factory dumping toxic materials in the air and water or maybe it has huge taxes or some other crippling restriction?
Even if you did not farm it, you could let it go to woodland and only use a small section for yourself. But you have to be able to own it free and clear from the bank and be able to pay the taxes on it to keep it. As I said, you rent land, not own it.
PrestonSturges on Sat, 5th Jul 2014 11:32 pm
>Even if you did not farm it, you could let it go to woodland and only use a small section for yourself.
It’s an inheritance and it was clear-cut badly about 10 years ago. It’s impassable snags and stumps. And it’s too small to be a managed tree farm.
98% of the road frontage was stupidly sold off by former owners.
The soil is ancient black loam sand which grows tremendous crops god knows how many yards deep. It grew tremendous crops even during an apocalyptic drought 5 years ago.
But nobody will buy undeveloped rural land unless it has further speculative value for future development. A good coastal storm can put parts of it a foot under (fresh) water for a day, and (unlike rural FL) there is plenty of land nearby with a 10′ higher elevation where someone would build expensive houses. So it has no speculative value.
So there’s the land good for nothing but farming, and there is no way in hell to get rid of it.
PrestonSturges on Sat, 5th Jul 2014 11:41 pm
Mind you, the article is hyping “farm land” which I take to mean acreage with high quality soil and water on undeveloped rural property as an investment. That’s what this is. The article is not promoting farms.
Anyway, undeveloped rural land has always been an investment with no rate of return until it stops being rural and someone wants to build something on it. Yes you can make a heap of money if WalMart builds on it, but that’s not flipping it as farm land.
Makati1 on Sat, 5th Jul 2014 11:59 pm
Seems like those acres could be reclaimed with some hard physical work. Were I 30 years younger and had a desire to stay in the US, I might buy it from you ‘cheap’. I owned an acre of wooded land for 35 years before I could do more than pay the taxes and cut a bit of fire wood. Then the township got a new codes officer and my land could finally be used. I built a home on it in my spare time over 5 years, got divorced and gave it to my Ex. So…
Davy on Sun, 6th Jul 2014 6:05 am
Mak, google the farm land per-capita in the US and that of the Philippians. That should tell you something. Even with all the development, erosion, and industrial Ag damage the US is the best placed in the world to reorganize around a postindustrial Ag economy. Now mind you it is a very large country and some areas will not adjust as well especially the drought stricken west in relation to the population size. Here in the Midwest we are well place to move back to the land. The Great Plains will repopulate with Buffalo and can be used to graze cattle. We have extensive woodlands to draw on. Mak, google deforestation in your native P’s. We have well place rivers to move our agricultural products. We are in good shape in the US with agriculture relative to the rest of the world, thank you.