As investors continue their search for alternative investment assets that offer capital preservation, income and inflation hedging characteristics, and that are supported by sound long-term fundamentals such as population growth and economic expansion, many institutional investors such as Pension Funds, Hedge Funds, Sovereign Wealth Funds, Family Offices and UHNW Individuals are turning to farmland investments to generate long-term gains without dramatically altering the overall risk profile of a balanced investment portfolio.
Currently, around 1% of institutional investments assets sit in agriculture investment, and most think tanks and analysts predict that this will rise to over 5% in the next five years, creating a spike in short-term demand and adding further upward pressure to demand and therefore prices. This might be described as the beginnings of a bubble, much like many real-estate bubbles before, but the bigger picture looks different this time.
On one side of the equation we have an increasing demand for commodities such as food and biofuels as the population continues to expand at the fastest pace in history. To put this into context; up until around 1800, the global population had risen and fallen in line with our ability to produce food using the basic of agricultural techniques, yet since the introduction of hydrocarbons for energy and agriculture, the population has increased from only 800 million to over 7 billion in just over 200 years. At the time our grandparents were born there were around 1.5 billion people to feed, and by the time we were born, that number had increased to around 5 billion.
Economic expansion in developing economies also contributes as wealthier populations shift toward a more protein based diet consuming more meat. In China alone, 50,000 people move from rural areas to urbanisations, and their diets gradually shift towards meat. According to a report by the Centre for World Food Studies in Amsterdam, meat consumption in China was around 20kg per person in 1985, reaching over 50kg per person by 2000, and projected to reach 85kg per person by 2030. As 1kg of meat requires the input of around 7kg of grain, the growing pressure on global cereal supplies is immense. If everyone in the world consumed as many calories as the average American, we would need to find farmland equal to 2.2 Earth sized planets simply to keep up with demand.
One the flip side of this equation we have supply of food, and ultimately the farmland that produces our food. At every point in the 38 year commodity price cycle where real assets have undergone sharp re-pricing due to shock increases in demand at a time of limited supply, there has been opportunity to increase supply, either through the development of new farmland, or through the developments and application of new technology such as the use of fertilisers during the Green Revolution which led to a significant on-going annual increase in agricultural yields.
Currently, population growth outstrips output growth at a time where little or no new farmland is available to bring to cultivation, and yield increases from the use of fertilisers are diminishing towards zero. This unique set of circumstances dictate that there is no obvious remedy to the supply demand problem, supporting the theory that higher food prices are here to stay as little can be done to increase supply yet demand continue to grow.
Those investors choosing agriculture investments in the form of the acquisition of quality farmland assets, are likely to be best positioned to benefit from the underlying fundamental trends such as population growth and economic expansion. Investors that acquire quality farmland at today’s price are likely to enjoy inflation-linked capital growth in the long term, as well as an expanding income stream from rentals or the production and sale of food crops.