IFAs and agents looking to broaden their offering of investment products should consider farmland – It’s a product with a great back story and it offers solid returns.

In this article Daniel Kiernan, chief investment analyst at Alternative Outlook outlines some of the benefits and key selling points of farmland.

What are the Benefits of Farmland for Agents?

Farmland offers three key benefits to agents:

• Favourable commissions
• Complimentary product
• Great backstory

Unlike gold, which we discussed in the column last week, commissions on farmland are favourable with property investment products

As an asset it’s another alternative investment that compliments agents’ current product suite. It’s similar enough to property that for an agent already selling property, it doesn’t look like the agent has just jumped on the latest bandwagon. You can avoid the perception that you’re just selling the “latest fad”. It also has lower entry levels then a lot of property investments, so you can sweep up some of the cash and not have to get consumers to make massive commitments.

The great thing about farmland is that it is supported by a very strong and easily understood back story – the growth of the world’s population. Currently the global population increases by 75 million each year and is forecast to reach 2.3 billion by 2050. That’s a lot of extra mouths to feed! This will require a 70% increase in global food production, yet the total amount of farmland in the world can only increase by small amounts and the amount of arable land per person on the planet has halved in the last 40 years.

Furthermore, as living standards rise in emerging economies demand for meat also rises:  for example during the 1980’s each person in China ate 20kg of meat per year on average. By 2009 that had increased to 50kg of meat per year.  This requires ever greater amounts of land to provide animal feed as it takes 7kg of grain to produce 1kg of meat.

With these kind of global pressures crop prices, and hence the price and the rents of farmland, will rise – perhaps very steeply.

We’re already seen evidence of this. The price of staple crops has risen by more than 80 per cent since 2005, according to the World Bank. There were food riots in 15 countries during a period of soaring prices in 2008 and the UN is predicting that food prices could rise by as much as 20 per cent in 2011. Making it hard for many people to pay for their groceries, but you can fill out a ebt application to help your family

Key Selling points

The great thing about farmland is that it is supported by a very strong and easily understood back story – the growth of the world’s population. Currently the global population increases by 75 million each year and is forecast to reach 2.3 billion by 2050. That’s a lot of extra mouths to feed! This will require a 70% increase in global food production, yet the total amount of farmland in the world can only increase by small amounts and the amount of arable land per person on the planet has halved in the last 40 years.

Furthermore, as living standards rise in emerging economies demand for meat also rises:  for example during the 1980’s each person in China ate 20kg of meat per year on average. By 2009 that had increased to 50kg of meat per year.  This requires ever greater amounts of land to provide animal feed as it takes 7kg of grain to produce 1kg of meat.

With these kind of global pressures crop prices, and hence the price and the rents of farmland, will rise – perhaps very steeply.

We’re already seen evidence of this. The price of staple crops has risen by more than 80 per cent since 2005, according to the World Bank. There were food riots in 15 countries during a period of soaring prices in 2008 and the UN is predicting that food prices could rise by as much as 20 per cent in 2011.

Farmland quite correctly has a perception with consumers as a solid, safe and perhaps slightly boring investment. As an asset it must be just about the oldest asset class there is and just about the most tangible – land can’t go anywhere!

The secure nature of the investment means that quality investment products can be structured like a bond with fixed annual payments over a fixed term.  Quality providers can calculate their product costs, accurately forecast their returns and therefore fix their payments to investors.

As we have said here before, alternative investments should be uncorrelated to equities and bonds and more commonly held investments. This means they can provide “portfolio insurance” by earning returns when you need themmost  when the rest of your portfolio is performing poorly. Farmland fulfils these criteria and is a strong inflation hedge – it’s positively correlated with inflation so when inflation risese and other assets value is threatened, farmland rises in value so it is a good store of waealth.

SIPPable

Low entry

Objections and issues to look out for

Abroad. o/s

DD – check for quality, independent agents, comfort in investment

Conclusions

Great back story

Solid investment

Comparable commissions

Large Scale Investment in Farmland

Here is a sample of the news around the increased demand for farmland from large scale investors:

• A World Bank Report in September 2010 notes that “45m hectares worth of large scale farmland deals were announced” in 2009, compared with annual average expansion of agricultural land of less than 4m hectares before 2008. Jürgen Voegele, director of agriculture at the World Bank, says in the report that “given commodity price volatility, growing human and environmental pressures, and worries about food security”, interest in farmland is rising and “The demand for land has been enormous”.
• In December 2009, Dixon Boardman, chief executive of Optima, a New York fund-of-funds business, announced plans for a $100 million fund to invest in American farmland. In the same month, the London-based Agro-Ecological Investment Management announced that it is raising $60 million to buy land in New Zealand.
• In March 2010 a study by NCB Capital noted that Saudi Arabia and the United Arab Emirates together now hold 2.8m hectares of agricultural land, primarily in Sudan, Pakistan, Turkey and Indonesia to safeguard sources of wheat, rice, soya beans, corn and alfalfa.
• In July 2010 Agrifirma Brazil announced its intention to list on the Hong Kong stock exchange after receiving the backing of Hong Kong tycoons. The business plan is to increase its land back from 60,000 to 100,000 hectares of land in Brazil and sell the produce of the land to China
• In November 2010 Sojitz Corp., a Japanese trading company, announced that is will start producing soybeans and other crops in Argentina for export to Asia to take advantage of rising demand.
• In November 2010 Abu Dhabi announced that it is to make a bold foray into commodities with the establishment of a government-owned trading house aimed at securing food supplies for the import-dependent nation.
• In November 2010 Russia announced that it may need to start importing grain after a heat wave a drought had destroyed more then one third of its crop. Russia was the world’s third biggest wheat exporter in 2009
• Others already established in this market include Deutsche Bank (pig breeding and chicken farming in China) and Russia’s Renaissance Capital, with 100,000 hectares of farmland in the Ukraine.