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Investing in farmland

Farmland

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.

 

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. 

 


 

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 last 48 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.

 

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.
Risks and other important considerations

Certain products and services may not be available to all entities or persons.

Past performance is not indicative of future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested. This document does not purport to be a comprehensive statement or description of any markets or securities referred to within. Tax assumptions and reliefs depend upon an investor’s particular circumstances and may change if those circumstances or the law change. Prospective investors should not rely on the information in this document and should make their own enquiries and evaluations they consider to be appropriate to determine the suitability of any investment (including regarding their investment objectives, financial situation and particular needs) and should seek all necessary financial, legal, tax and investment advice. If you invest through a third party provider, you are advised to consult them directly as charges, performance and terms and conditions may differ materially.

The views and opinions expressed are for informational and educational purposes only as of the date of production/writing and may change without notice at any time based on factors such as market conditions or legal and regulatory developments. All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. This material may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections, forecasts, estimates of market returns, and proposed or expected portfolio composition. Any changes to assumptions made in preparing this material could have a material impact on the information presented herein. Past performance is no guarantee of future results. Investing involves risk; principal loss is possible. This information does not constitute investment research as defined under MiFID.

As an asset class, agricultural investments are less developed, more illiquid, and less transparent compared to traditional asset classes. Agricultural investments will be subject to risks generally associated with the ownership of real estate-related assets, including changes in economic conditions, environmental risks, the cost of and ability to obtain insurance, and risks related to leasing of properties.

Nothing in this document is intended to be or should be construed as advice. This document 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 document 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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