This month’s column in InDUS Business Journal by Raj Sharma explores insights on an exciting new asset class: global agriculture.
It is important to note that a well diversified portfolio has a balanced mix of equities, fixed income, cash, and a variety of investments, possibly including alternative investments. This includes a wide range of asset classes, such as currencies, real estate, commodities, and agriculture, which is this article’s focus.
Research suggests the agriculture asset class — which includes farmland, timberland, lumber and agricultural commodities like wheat or corn — shows potential for capital appreciation. For example, steady growth in global grain consumption can be attributed to the increasing prosperity in developing countries.
In fact, according to a Bank of American Merrill Lynch Global Research report from October 2011 called “Global Agricultural Supply and Demand Trends: Key Regions, Key Commodities” world consumption is expected to grow at a compounded annual growth rate of 2.2 percent from 1965 to 2012, while production is expected to grow at a slightly lower rate of 2.1 percent.
In contrast, the total area of grain harvested is only expected to grow by 0.3 percent during the same time period. Also, global grain yield is expected to fall from an average of 1.2 percent between 1965 and 2012 to a run rate of 0.1 percent between 2002 through 2012. Thus, the demand for grain has increased significantly, causing some investors to explore whether it is an attractive investment option for their portfolios.
Farm prices have also risen as global demand for food has increased and a series of weather-related production shortfalls and the drain off of certain crops for bio fuels have significantly increased the cost of staples such as corn and soybeans.
According to the, “Global Agricultural Supply and Demand Trends: Key Regions, Key Commodities” report, high commodity prices are putting pressure on the entire supply chain, making the owning farmland another investment to consider. Remember that these reports are general in nature and do not take into account specific investments objectives, financial situation and particular needs of whoever may receive it. Therefore, investors should understand this is not intended to provide individual investment advice, and any statements regarding future prospects may not be realized.
One potential benefit of a direct investment like farmland is the possibility of an annual income stream, usually through lease payments from tenant farmers. According to the Merrill Lynch Wealth Management Viewpoint, “Back to the Land,” strategists believe that timberland offers one of the world’s most efficient engines for appreciation: the trees literally grow in value each year — more or less on their own.
A direct investment in farm and timberland carries some unique risks, however, similar to any alternative investment. One of the main risks is liquidity, as it may be challenging to convert these types of assets to cash. Note that these are long cycle investments, oftentimes with a lifespan of at least ten years or more. Alternative investments are intended for qualified and suitable investors only. Alternative investments involve limited access to the investment and may include, among other factors, the risks of investing in derivatives, using leverage, and engaging in shorts sales, practice which can magnify potential losses or gains. Alternative investments are speculative and involve a high degree of risk.
If investing in a physical asset is not a viable option, you may want to consider investing in global agriculture through indirect financial instruments such as shares of agricultural companies, commodity futures, or exchange traded funds (ETFs) that track agricultural indexes and timberland real estate investment trusts (REITs). This option offers considerably lower barriers to entry than buying physical land, and typically has lower risks related to liquidity, although all investments involve risk.
Keep in mind that investments are not FDIC-insured, may lose value and are not bank guaranteed. As always, before making an investment in this sector, please consult your financial advisor and take into consideration various personal financial factors such as your net worth, time horizon, risk tolerance, cash flow needs, liquidity parameters and overall financial goals.
Raj Sharma is a Merrill Lynch managing director of investments and a private wealth advisor for the firm’s private banking and investment group in Boston.