Agriculture Investment Funds, Direct Agricultural Land Investment, and Equity Purchases in Agricultural Companies In this essay, I will investigate the many investment possibilities, the risks they provide to investors, the mechanics of how each type of agriculture investment works, and the current returns.
First, we will consider if agriculture investment is relevant in the current economic context and whether this industry has the potential to provide growth and profits.
Current Economic Conditions
The global economy is still in upheaval, and the United Kingdom in particular is slashing public spending to reduce an untenable national debt. The population is expanding, and quantitative easing is likely to usher in an extended period of inflation. In addition, the absence of economic foresight makes it exceedingly difficult to assess assets such as stocks, and the extremely low interest rates mean that our cash deposits provide no measurable income.
What does this implication entail for investors? It means that we must purchase assets that have a positive correlation with inflation, i.e., they increase in value faster than the rate of inflation. Additionally, these assets must create an income to replace the income lost from cash.
Agriculture investment, particularly investing in agricultural land, exhibits growth, income, a positive correlation with inflation, is easy to value, and has a clear and visible track record to analyze; therefore, agriculture investment may be the best asset class for investors in the present day.
Agriculture Investment Fundamentals
As the world population increases, we need more food; to produce more food, we need more agricultural land, as this is the resource that produces all of the grains and cereals that we consume, as well as the grazing land for the animals that ends up on our plates. Therefore, we are dealing with a fundamental subject of supply and demand; if demand increases and supply can’t keep up, the value of the underlying asset rises; therefore, let’s examine some of the most important indicators of supply and demand for agriculture investment.
In seven of the last eight years, we have consumed more grain than we have produced, reducing the global grain supply to dangerously low levels.
The amount of agricultural land per person has decreased by fifty percent since 1961. (0.42 hectares per person down to 0.21 hectares per person in 2007).
By 2050, the global population is projected to increase by 9 billion.
According to the majority of think tanks and experts, we will need to raise the quantity of agricultural land by 50 percent to support this expansion, which equates to finding a productive field the size of Greater London every week.
In the past ten years, almost no more farmable land has been acquired due to climate change, land degradation, and urbanization, among other factors.
The underlying asset that produces our food, land, will increase in value as population increases.
The value of agricultural property increases when the food it provides can be sold for a greater price, making ownership of farmland more lucrative. Currently, food prices are at a 40-year low, leaving room for price inflation of almost 400 percent. In fact, a bushel of wheat cost approximately $27 in the early 1970s, but only $3 today.
The value of farmland in the United Kingdom increased by 20% between June 2009 and June 2010, and by 13% in 2010 alone, according to the Knight Frank Farmland Index.
Therefore, the fundamentals supporting agriculture investment are sound and provide a very positive outlook for potential investment. However, can we absorb inflation? Numerous studies demonstrate that as a population, we absorb nearly 100 percent of food price rises by reducing expenditure in other areas, thus the answer is yes.
Methods of Investment in Agriculture
Agriculture Investment Funds
There are numerous types of agriculture investment funds available, with the majority investing in farming enterprises, others in arable land, and yet others in agricultural services companies via shares. The majority of farm investment funds are exhibiting good growth, and the fact that they are buyers has improved market demand, so adding to capital growth. Rural agent Savills recently stated that they have access to £7 billion in capital from fund to purchase farms, which is sufficient capital to purchase six times the amount of farmland that will be advertised in the United Kingdom this year. In fact, according to Knight Frank, there has been 30% less farmland advertised this year compared to last year, and buyer inquiries have increased by 9%.
To briefly discuss risk, the risk associated with this fund-based investment strategy is that you relinquish control to a fund manager who will spend your money and acquire appropriate assets in his or her opinion. Moreover, if one fund underperforms, it typically has a domino effect on other farm investment funds, as investors lose faith in this particular strategy. As a result, you may lose value through no fault of your own. Additionally, you must pay a fund management fee, which reduces your returns.
The returns one can expect from a fund vary widely, but most estimate yearly returns of roughly 10%, but this will vary based on a variety of factors such as fund management, investing strategy, and market conditions.
Purchasing Agricultural Company Shares as an Investment in Agriculture
The purchase of shares in an agricultural business, be it a farming business or a services business, is another option for those interested in agriculture investment. The options to consider vary widely, and careful consideration must be given to selecting a suitable market (LSE, NASDAQ, etc.) and then a suitable company in which to invest. Only companies with solid fundamentals should be added to a portfolio, and the task of selecting stocks should be left to individuals who have the time, experience, and resources to thoroughly investigate the firm, its management, and its product range.
As with any equity-based investment, the risk is that a market downturn can cause a solid firm to lose value and negatively impact the investor’s wealth. We have all witnessed in recent years how a bear market can bring down profitable companies, and the entire premise of agriculture investment is to avoid financial markets and add a non-correlation element to a portfolio, ensuring that the investor owns an asset that is unaffected by volatile stock markets.
So, does a share investment in agriculture meet the criteria? Well, no, since we were seeking stability, non-correlation, a positive correlation with inflation and income, and this style of farm investment does not meet any of these criteria, with the exception of a nominal dividend.
Purchasing Farmland as an Investment in Agriculture
The most prudent method for investors, in my opinion, is to acquire property that has a history of delivering income yields and then rent that acreage to a commercial farmer. This mode of agriculture investment provides access to an asset with all of the desired characteristics, including non-correlation with stock markets, positive correlation with inflation, income, and growth, as UK farmland continues to increase in value while remaining half the price of agricultural land in Ireland, Denmark, and the Netherlands, leaving a substantial margin for future growth.
There are also a number of risks to consider, such as sourcing good land and sourcing and managing a farming tenant. However, these risks can be effectively managed by partnering with an agriculture investment consultancy that will handle the sourcing of both land and tenant, as well as all ongoing management.
In conclusion, if one want to invest in agriculture, the greatest alternative at this time is to purchase agricultural land, which provides growth and income in a volatile market.
