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Follow on Google News |  Fair Deal Alternative Investment Series: Profiting from Farmland Investment...investigate investment strategies employed by some of the world’s largest investors. We also examine the risks and barriers stopping the smaller investor from participating in farmland investment, timber and investing in renewable energy.
By: Jan de Vries In this series of articles I will investigate the case for each, and present investment strategies employed by some of the world’s largest investors. We will also examine the risks and barriers stopping the smaller investor from participating in farmland investment, timber investment and investing in renewable energy. The case for such alternative investments is certainly compelling, with sound fundamentals underpinning the prospect of stable future returns without any correlation to equity markets. Many investors see fundamental assets such as agricultural land as a safe haven for capital with the added bonus of generating an annual income to replace the income lost on cash deposits, essentially gold with an income. Many of the world’s leading lights in the field of investment such as Jeremy Grantham and Jim Rogers are encouraging investors to buy farmland and timber plantations, stating that these will be the best assets to own for now and in the future. Here I will address three key questions: What are the basic fundamental facts? What are the main barriers and risks for smaller investors? How do smaller investors gain the best mid to long term exposure to these sectors? Agriculture and Farmland Investment: The Story Firstly let’s look at the story for agriculture investment; The basis of this investment strategy is that we will need to produce more grain (wheat, maize, soy etc.) to feed a larger population, and we have very little land left suitable for agricultural production, in fact we are losing good agricultural land every day to desertification, urbanisation, climate change and biomass fuel crops. This upward pressure on demand, and suppression of supply will drive growth in the price of agricultural land as the resource is more in demand and more scarce, the land we do have becomes more valuable. This then lends to the investment strategy taken up by major institutions and pensions funds of buying up huge commercial farms and enjoying regular income from the sale of crops as well as growing their capital, without any correlation to the stock market. Here are the facts: The global population is growing daily at a rate of 200,000* (75 million per annum), to put this into context, that growth requires that we find a field the size of England and Wales put together every year to feed all of those mouths. There is approximately 3% more farmland we can bring into production globally. This is not enough to support future expansion. Annual yield increases from the land have dropped to just 0.6%.** The amount of farmland per capita (global) has halved from 0.42 hectares to 0.21 hectares between 1961 and 2007.*** Between 1961 and 2000 population increased by 113.9%, whereas global arable land grew by only 10.2%. **** Agriculture and Farmland Investment: Risks and Barriers The problem for investors who seek exposure to agriculture is that buying a working farm large enough to operate on a commercial scale takes a lot of capital, with Savills requiring potential investors to state their capacity to have at least £5m to hand to build a farmland investment portfolio, so capital is a very clear barrier for those of us with pockets not so deep. There are some niche options for savvy investors seeking direct exposure to farmland which I will cover in our main guide available for download at http://farmland- The specific capital risks involved in investing in agriculture will depend very much upon your investment strategy. For example, buying agricultural ETF’s offers wide ranging exposure to commodities and agribusiness companies yet does not diversify outside of the markets. Therefore a stock crash would obliterate the value of the ETF holding only agribusiness companies which defeats the object of seeking a non-correlated investment. Likewise, an ETF holding only commodities has 100% exposure to potentially volatile commodity trading markets and again retains little value in a black swan event or sharp downturn in prices. Buying land directly also carries risk; general agricultural risk including bad weather and bad management can have an adverse effect on the yield produced annually, likewise at the time of harvest the land owner / farmer is a price taker and is subject to the fluctuations of commodity markets. The thing is, these are all short term risks, and a bad harvest will bite into income, but will not affect the long term value of the land, and anyway, your farm produces another yield next year, and the year after. Unlike an oil field, farmland is a renewable resource consistently generating a return from the growth of new crops, sometimes twice annually depending on location. Even in a worst case scenario of a nil harvest, 99% of farms bounce back the next year and continue to produce, whilst the capital is safely growing tied up in the most valuable of resources. Agriculture and Farmland Investment: Investment Options As I have mentioned previously, investors can buy ETF’s, they can buy agribusiness mutual funds, they can invest directly into agribusinesses, but none of these strategies provide, in my own experience and opinion, non-correlation to markets, total diversity, consistent income, capital preservation, and inflationary growth, the only way to achieve this is buying the farm and planning to hold for the mid to long term (5 to 10 years). Every year you will see an income, and in the mid to long term the general consensus is that the asset you own will be worth considerably more than you have paid for it. For information on a range of income producing direct farmland investment opportunities geared towards smaller investors, please download our guides at: 1) http://farmlandinvestments.fairdealinvest.com 2) http://farmland- 3) http://www.uk- *Source: United Nations Population Division, 2007 **Source: Food and Agriculture Organisation of the United Nations, 2009 ***Source: UN Population Division, 2007; FAO, 2009 ****Source: UN Population Division, 2007; FAO, 2009 # # # Fair Deal Invest publishes free investment newsletters with land, property & alternative investment recommendations. All our recommendations have been thoroughly researched and have passed strict diligence procedures. http://fairdealinvest.com End
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