Agricultural land investment is clearly the hot ticket of the moment, with every level of investor from institutional funds such as Schroders and Barings investing millions of pounds, to smaller retail investors with a few thousand seeking good quality farmland for investment. Whether you have access to 50 million or 20,000, there are projects and strategies available on the open market to suit your budget and requirement, from the UK to Australia, and from the Ukraine to South America, all with subscribing to different investment strategies, and some less credible in terms of end value than others.
One part of the current trend that alarms me is the apparent rush of retail investors to invest in farmland overseas, buying up title or leases with little or no comprehension of the true value of the underlying asset. For which they are parting with hard earned cash for. Agricultural land produces soft-commodities (food), and as such the value of the land is intrinsically linked to current pricing trends for whichever commodity is being produced by that land, along with a host of other factors. Currently food commodity prices are at a forty year low, indicating a huge margin for growth in value of both soft-commodities and therefore the underlying asset that produces them, yet investors that lack experience seem to be purchasing or leasing farmland outside their domiciled country without sight of any kind of credible, regulated valuation, seemingly smitten with the story of growth and income, without truly understanding the fundamentals supporting farmland investment, risk, or exit strategy.
When speaking to clients on a daily basis about the relevance of investing in farmland as part of an overall low-risk strategy, I think it is most important for investors to understand the fundamentals supporting agricultural land investment, as well as the various investment strategies that can be employed to gain exposure to this sector and asset class, and more importantly, investors should have enough knowledge to decide whether farmland investment is a suitable asset allocation strategy to suit their own needs. Here are some of the broad profiles of investors that should or should not investigate the prospect of investing in farmland:
- Investors that Should Consider Farmland
- Investors that Should Not Consider Farmland
- Investors holding cash as part of a low-risk portfolio
- Investors with a requirement to leverage
- Investors requiring stable, consistent income
- Investors with a high-risk approach / strategy
- Investors with a necessity to hedge inflation
- Investors with a risk-averse approach
- Investors desiring exposure to property
Current Market Conditions
If this article is to be well-rounded and achieve the goal of helping the investor to make an informed decision, it is important to explore the current market conditions that have led to this whirl of interest in farmland investment from both the retail and institutional sectors.
Firstly, we are seeing price volatility in more traditional asset classes such as stocks and bonds, which is a result mostly of the fact that the world is still in a precarious economic position with very poor levels of forward visibility. With Economists unable agree with each other and comfortably project where our global and national economies are headed, it is very difficult to price and value assets such as companies, and therefore the shares that make up these businesses.
Secondly, on a global basis, and specifically in the UK, the central bank has undertaken a policy of quantative easing, i.e. printing more money and flushing it into the main supply in an effort to kick-start the economy. This will lead to higher levels of inflation to some degree, and in an inflationary environment investors seek to protect their wealth by purchasing assets that have a positive correlation with inflation i.e. their value rises when inflation rises, providing growth for the investors over and above the rate of inflation..
Thirdly, investors have always kept back some cash as part of their portfolios, feeling it is the safest of assets offering the lowest level of capital risk, whilst at the same time providing an income return relevant to the interest rate they achieve. In the current climate with central bank interest rates so low, investors have lost these risk-free returns, so must seek out an asset that not only grows in value, but also produces an income to replace the lost revenue.
These three characteristics that define the current economic playing field all combine to draw investors to the idea that investing in farmland is a sound strategy, and that a well-placed farmland investment will provide not only the inflation beating growth that is required, but also replace the income lost from cash deposits, as well as provide the low-risk stability that is required in times of poor visibility, as farmland is one of the very few assets that are absolutely essential to the survival of the human race yet is in ultimately short supply, ensuring that sound fundamentals support a continuation of the current value growth, and increasing income streams as food commodity prices start to increase to previous levels.
So how does arable land perform as an investment asset? Well some of the key characteristics of agricultural land investment are as follows:
Investing in farmland provides a proven inflation hedge, with data showing very clearly that tillable land shares a positive correlation with inflation. Historically farmland values increase faster than inflation, which lend investors confidence in the asset as not only an inflation hedge but also a capital preservation tool as farmland is viewed as a low-risk asset as the investment is underpinned with an asset that is in limited supply but where demand for food is increasing at an astounding, and frankly unsustainable rate, and unlike other commodities that we require for day to day operation such as oil, metals or gas, farmland is a renewable resource that continues to produce food season after season.
Agricultural land investment is also a good strategy for stable, consistent income, as unlike other popular low-risk investments such as gold, farmland also provides regular income, either from the commercial farming activities, or from renting the farm to a farmer to work the land and capturing a rental income instead. With farming tenancy occupancy rates at nearly 100% in the UK, this income is stable and regular, making investing farmland ideal for those investors seeking low volatility income.