Agricultural Investment – Must Read Article
Agricultural Investment – Must Read Article : Finding the best agricultural investments can be difficult for inexperienced investors with little or no knowledge of the sector, but of course there are many different options available including farm investment funds, direct farmland investments, and buying equity in agricultural companies.
In this article I will explore some of the different options, the risks they present to investors, the mechanics of how each type of agricultural investment works, and the returns currently being achieved.
We will first look at the relevance of agricultural investment to the current economic climate, and whether the sector is showing us any signs of being able to generate growth and income.
Current Economic Climate
The global economy is still in a volatile state, and the UK in particular is cutting back on public spending to reduce the runaway national debt, the population is growing, and quantitative easing is likely to lead us into a period of prolonged inflation.
Also, the lack of economic visibility means it is very difficult to value assets such as stocks, and the extremely low interest rates mean that our cash deposits are not generating real income to speak of.
So what does this mean for investors? This means that we need to buy assets that are positively correlated with inflation i.e. their value is rising faster than the rate of inflation, these assets must also generate income to replace the income that has been lost from cash, and finally any asset that we buy must also have a good track record strong and measurable.
It is very clear that agricultural investment, especially investment in agricultural land, displays the characteristics of growth, income, positive correlation with inflation, is easy to value, and has a clear and tangible track record to analyze, and thus agricultural investment is suitable. all relevant boxes to potentially be the ideal asset class for today’s investors.
Agricultural Investment Fundamentals
The fundamentals underpinning agricultural investment are fairly easy to measure; as global population grows, we need more food, to produce more food, we need more farmland because these are the resources that provide all the grains and cereals we eat, and all the space to graze the livestock that ends up in us.
plate. So we are dealing with a very basic question of supply and demand, if demand increases and supply can’t keep up, the value of the underlying asset increases, so let’s take a look at some of the main indicators of supply and demand for agricultural investment.
For seven of the last eight years we have consumed more grain than we produce, bringing global stores to a critical level.
Since 1961 the amount of agricultural land per person has fallen by 50% (0.42 hectares per person to 0.21 hectares per person in 2007).
The global population is expected to grow by 9 billion by 2050.
Most think tanks and experts believe we need to increase the amount of farmland by 50% to support that growth, which is essentially the size of London’s productive land that needs to be discovered every week.
In the last ten years almost no more land has been bought for production as climate change, degradation and development and a number of other factors mean that there is little or no new land that we can use for farming.
The basic asset that produces our food, land, will become more valuable as more and more people demand food.
The value of farmland increases when the food it produces can be sold at higher prices, making farmland ownership more profitable, and food prices are at 40-year lows, leaving room for price inflation of around 400%. In fact, a bushel of wheat cost about $27 in the early seventies and now costs only $3.
Agricultural land in the UK has increased in value by 20% from June 2009 to June 2010, and 13% in 2010 alone according to the Knight Frank Farmland Index.
So, the underpinnings underpinning agricultural investment are quite strong and very clearly show a good picture for potential investment. But can we absorb price inflation? Well, there’s a myriad of studies that tell us very clearly that as a population, we absorb almost 100% food price increases, at the expense of spending in other areas, so yes, we can.
Methods of Agriculture Investment
Agriculture Investment Funds
There are many types of agriculture investment funds to choose from, most invest in farming businesses, other purely in affordable land, and others by stock in agricultural services companies. Most agriculture investment funds are showing excellent growth, and the fact that they are buying has increased the level of demand in the market therefore their presence is contributing to capital growth.
Rural agent Savills recently commented on the fact that they have access to £7 billion in capital from fund to purchase farms, that is enough capital to purchase six times the amount of farmland that will be advertised in the UK this year, in fact, according to Knight Frank there has been 30% less farmland advertised this year from last, and buyer inquiries have increased by 9%.
To talk about risk for a moment, the risk involved with this fund based investment strategy is that you give over control to a fund manager who will spend your money for you and acquire assets that he or she believes are relevant.
Also, if one fund performs badly, that usually has a knock on effect for other agriculture investment funds as confidence in this particular strategy takes a hot, you can therefore lose value through no fault of your own. You also have to pay a fund management fee, eating into your profits.
In terms of the returns one can expect from a fund, this varies wildly but most project annual returns of around 10%, although this will vary depending on a whole host of factors including the fund management, investment strategy, and general market conditions.
Buying Shares in Agricultural Companies as an Agriculture Investment
Another option for choosing considering cashing in on agriculture investment is to purchase shares in an agricultural business, be that a farming business, or a services business, the options to consider vary wildly and careful thought must be undertaken to pick a suitable market (LSE, NASDAQ etc), and then a suitable company in which to invest.
The business of picking shares remains, in my opinion, a job best left to those with the time, experience and resources to carefully research the company, its management, and it product line, and only those company displaying sound fundamentals should be added to a portfolio.
The risk here is as with any equity based investment, a down-swing in the market can cause a good company to lose value and thus affect the wealth of the investors in a negative way.
We have all seen recently how a bear market can bring down profitable companies and the whole premise of agriculture investment is to avoid financial markets and add an element of non-correlation to a portfolio, ensuring the investor owns an asset that is unaffected by volatile stock markets.
So does an agriculture investment in the form of shares fit the bill? Well not really, as we were looking for stability, non-correlation, a positive correlation with inflation and income, and this mode of agriculture investment ticks none of those boxes other than a nominal dividend.
Buying Farmland as an Agriculture Investment
In my opinion, the strategy that makes the most sense for investors is to acquire profitable farmland that has a track record of generating income, and lease that land to commercial farmers.
This agricultural investment mode allows buyers to access assets that display all the characteristics we are looking for, non-correlated with the stock market, positive correlation with inflation, income and growth, as UK farmland continues to increase in value but is still only half the price of farmland in Ireland , Denmark and the Netherlands, leaving large margins for future growth.
Of course there are a number of risks to consider here as well, for example, good land acquisition, and of course the procurement and management of farm tenants, all these risks can be managed effectively by partnering with a specialist agricultural investment consultant who will handle the procurement.
both land and tenants and also handles all ongoing management as well.
So to summarize, if one is making agricultural investments, the best option right now is to buy farmland, providing investors with growth and income in volatile markets.