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Farmland

Investing in farmland

Rows of crops

How does direct investment in global farmland provide diversification, inflation protection, and return potential?

 

By 2030, the world’s farmland will likely have to support a population of more than eight billion people— an increase that will require a 25% boost in agricultural productivity.

At the same time, the developing world’s middle class is likely to continue to upgrade its diet, consuming more protein, and subsequently increasing pressure on global grain supplies. Moreover, industrialization and urban development continue to encroach upon the world’s finite farmland resources. As water becomes an increasingly scarce resource, agricultural regions with sustainable water supply will become implied exporters of water by virtue of their crop production.

For these reasons, direct investment into global agricultural land presents an increasingly compelling investment opportunity, as it offers potentially stable returns on investment, low correlation to other assets and a hedge to inflation.

Investing in globally diversified farmland

 
Supply and demand fundamentals are positive

Investing in agricultural land is a fundamental way to benefit from the growing worldwide demand for food. The case for investing in this asset class is not only strong now, but becoming stronger, due to several positive fundamental factors.

Growing populations will require more food

According to the UN, the world’s population is currently expanding by over 50 million people per year. By 2030, agricultural producers will have to support a population of more than eight billion people. The Global Harvest Initiative 2018 GAP Report estimates that to meet global demand by 2050, agricultural producers worldwide will have to double their output from 2005 levels. This will require an annual average growth of at least 1.75% in total factor productivity (TFP)—or the output per unit of total resources employed in production. The USDA’s Economic Research Service estimates that since 2002, global agricultural TFP rose by an average annual rate of 1.69%. Although this growth rate does not seem significantly lower than the required 1.75% needed to meet future demand, when compounded over 40 years, output would fall six percent short of the target. This potential short-fall is driven primarily by increasing constraints in developing countries such as China and Brazil. However, as developing nations face constraints, including China’s limited clean water supply, significant challenges remain in order to sustain the required productivity growth. In the face of continuing population growth and limited land base, farms globally must continue to do more with the same resources. As a result, there is likely to be continued pressure on prices for food-producing land.

Developing countries continue to increase protein consumption

The developing world has a growing middle class that will, as it becomes increasingly prosperous, consume greater quantities of protein. The Organization for Economic Co-operation and Development (OECD) estimates that consumption of major meat proteins (beef and veal, pork, poultry and lamb) in developing countries will increase by 22.3%, or approximately 2.0% per year, through 2022. Producing a single pound of protein requires approximately ten pounds of feed grain, thus a shift toward greater global protein consumption will increase demand for grain dramatically.

In the face of continuing population growth and limited land base, farms globally must continue to do more with the same resources.
Population growth
Regions with secure water resources will become increasingly valuable

As water becomes increasingly scarce, farmland with sustainable water resources, including surface and groundwater, should see enhanced valuations. Given the necessity of water in agricultural production, agricultural exports are a method of transferring water from those countries with abundant water resources to those with lesser water resources.

Development and industrialization will continue

Farmland globally continues to disappear under pressure from residential, business and industrial development. We expect this trend to continue and further limit the global supply of agriculturally productive land going forward.

Some large food producers will become consumers

China needs to feed 20% of the world’s population with approximately 8% of the total arable land—and their supply of arable land is shrinking as urbanization continues. Additionally, the country faces substantial clean water challenges, limiting their ability to bring additional land into production or improve the productivity of the existing land base. As China’s population expands, urbanizes, and diets improve, the world’s most populous country will become increasingly dependent on agricultural imports. In addition to China’s significant presence in the soybean market, in 2011 the country became a net importer of wheat and rice, significantly increasing its reliance on foreign grains.

Together, these factors will drive increased values for agricultural land and create opportunities for early investors in global farmland.

Projected CAGR (2017-2027)

World population

1.0%

Wheat yield gains

0.8%

Corn yield gains

0.8%

Soybean yield gains

0.9%

The key features of farmland investments

For the past 48 years, investments in U.S. farmland have achieved attractive total returns relative to asset classes like stocks, bonds and real estate, while also providing strong diversification benefits and a hedge against inflation.

A global portfolio of agricultural assets may provide all these advantages, as well as the additional risk mitigation that comes from diversified exposure to the world’s economies. While we anticipate demand to remain relatively inelastic over time, supply shocks in certain regions or countries provide support for investing on a diversified, global basis.

Historically strong return

Agricultural land, as measured by the U.S.-only NCREIF Farmland Index, has outperformed both domestic stocks and bonds on an annualized basis over the last48 years, providing both consistent income and capital appreciation. Although a global farmland benchmark has not been developed, we believe a global portfolio will deliver higher returns, due to the enhanced diversification, faster growth rates and lower valuations in emerging economies.

valuations in emerging economies
Attractive risk-return characteristics

When measured on a risk-return basis, farmland compares favorably to other asset classes, demonstrating strong returns per unit of risk.

Diversification potential

Over time, agricultural investment performance has moved in different cycles from traditional asset classes such as stocks and bonds; as a result, adding farmland to a portfolio enhances diversification and can result in lower volatility. Over the past 40 years, agricultural land has demonstrated a low correlation to both stock and bond indexes. Moreover, a globally diversified portfolio of agricultural investments can further reduce risk, as it spreads its exposure among a variety of crops, government structures and climates. When there is drought in Russia, for instance, growing conditions in Australia may be very positive. By investing globally, the impact of unexpected events in any single portion of the portfolio can be reduced.

Inflation hedging qualities

Historical farmland returns have outpaced inflation in a variety of market environments. The NCREIF Farmland Index’s Total Return has consistently provided returns more than double the inflation rate since 1991.

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Risks and other important considerations

Investments in farmland have specific risks, including fluctuations in property value, higher expenses or lower income than expected and environmental problems and liability. Weather conditions have historically caused volatility in agricultural commodities by causing crop failures or significantly reduced harvests, which can affect the supply and pricing of the agricultural commodities for tenants or on direct farming operations. Agricultural commodities also can be affected by factors such as plant and crop disease.

Nothing in this material is intended to be or should be construed as advice. This material is not a recommendation to sell or purchase any investment. It does not form part of any contract for the sale or purchase of any investment. Any investment application for a fund will be made solely on the basis of the information contained in the relevant fund’s offer document (including all relevant covering documents), which may contain investment restrictions. This material is intended as a summary only and (if investing in a fund) potential investors must read the relevant fund’s offer document before investing.

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