Farmland is a growing investment market, in more ways than one. Demand for crops and livestock is increasing as the global population grows and eating habits evolve. The world’s population is expected to reach 9.1 billion by 2050, with the majority of growth coming from developing countries. The UN Food and Agriculture Organisation (FAO) estimates that food production must increase by 70% to meet those needs – to meet these needs, more investment in farmland is necessary.
Investment into Farmland
A spike in global crop prices in 2007/08 and the subsequent volatility in food prices reminded a number of developed, import-led countries about their food insecurity, prompting a new round of investment into arable land. A record 56 million hectares (ha) of farmland was sold in the following year (2009) and more than 70% of that was in Africa, in countries such as Ethiopia, Mozambique, and Sudan.
Investment into farmland has historically been dominated by privately held investments by wealthy families. The unique structure and benefits farmland offers makes it an attractive option for those wishing to diversify their portfolios from mainstream financial assets and hedge against inflation.
Returns
Returns come from the harvested crops which are sold on the commodities market – locally, nationally and internationally. According to Savills, returns from the top performing operations across the world varied from 3% to 15% per year. Due the global nature and types of products in market and systematic risk, returns can vary greatly.
According to the Savills Global Farmland Index, the average increase in the value of global farmland has been just over 20% per year since 2002. The highest growth has come from emerging countries such as Romania, Hungary, Poland, Zambia, Mozambique and Brazil. Developed countries have also seen healthy growth (although not as strong) ranging from 7% to 20% per year.
Investment Options
Farmland offers a wide choice of options: different locations; investment structures; types of crops being grown and potential returns. Some crops will be more suited to certain locations; land will often be cheaper in developing countries etc. But this doesn’t guarantee higher returns. The types of crops available for investment can vary from the common to niche products. Until recently, it was very difficult for individuals to break into this asset class. More investment structures are becoming more widely available to investors. Investors can gain direct access to the sector through a number of unregulated investments including directly held land, collective investment schemes and investments with a corporate structure such as fixed interest bonds. Characteristics of these investments vary by the minimum investment required, returns, exit strategies, locations and level of investor involvement.
Considerations
The global nature of the agricultural industry brings up a number of things to consider when assessing this asset class. Planting and harvesting times are very different country to country for various crops. Influences, such as weather, can affect harvesting and ultimately returns. Farming also requires inputs: fertilizer; seeds; expert labour; transportation; equipment etc. The cost and efficiency of these inputs will directly affect the performance and profitability of the investment.
Investors may consider the option of foreign farmland as well. Agricultural regulations and environments are unique to each country. An investor should be well-informed on the regulations and ensure that they are operating within those rules.
Farmland offers numerous options to investors, it produces something that is highly in demand and it’s a limited resource – added to that returns have been (and should continue to be) strong. But investors must be well informed on the projects being considered and aware of risks involved.