There are a number of fundamental trends that drive returns in agriculture investments when assessed in their simplest form- farmland investment.
The current economic climate is defined by low interest rates giving poor returns on cash, volatile equity markets adding disproportionate amounts of risk, and the potential for a sustained period of above average inflation destroying returns and eating into capital. Under such circumstances, investors are looking to acquire assets that display a certain set of characteristics with hope of decoupling part of an investment portfolio from traditional assets and wider market forces, hoping to generate a non-correlated return, replace lost ‘risk-free’ income and protect capital. Agriculture investments, especially farmland investments, display all of these characteristics and hence both institutional and private investors are seeking to add value to their portfolios through exposure to prime agricultural investment assets such as farmland.
Investing in farmland allows the savvy investor to capture long-term food price inflation in the capital value of the underlying farmland assets, as the value of produced crops increases over time, the land producing those commodities in turn becomes more valuable. One must look then to the most basic fundamentals of supply and demand to project future demand and weigh that likely demand against the global yield capacity, taking into account the volume of total farmland and the maximum achievable yield.
On the one hand, expansion of farmland volumes is not possible on any useful scale as the majority of good land has already been used, development of new farmland through agriculture investments has slowed considerably since the 1960′s with little useful land with water left to develop and bring under agricultural cultivation. Indeed, the per capita stock of global farmland has fallen from 0.42 hectares per person in 1961, down to 0.21 hectare per person in 2005, and has fallen since.
Increasing yield per hectare is also an unlikely solution using current technology, as yield increases from the green revolution (the introduction of fertilisers) has fallen substantially, creating yield growth of less than 1% per annum. Unless new technologies are developed to increase yield through active agriculture investments, then global food production is likely to remain at current levels before starting to drop off as less land is available for food production.
At the same time the global population is increasing at the fastest pace in human history, as the introduction of hydrocarbons in the early 1800′s saw the population rise from around 800 million to present-day numbers of up to 7 billion, and heading towards 9 billion between 2030 and 2050. Every day the world’s population increases by more than 200,000 people that all require food. This growing population is also becoming wealthier, demanding a high protein diet and consuming more meat. Meat consumption per capita in China has risen from 20 kg per annum in 1985, to 50 kg per annum today and is projected to peak at 85 kg per person per annum by 2030, and as each kg of meat based protein requires the input of 7 kg of grains and huge amount of water, this change in wealth dynamics, especially in emerging and developing economies, will account for the lion’s share of future food demand.
In conclusion, demand for food, animal feed and fuel is rising in line with basic socio-demographic trends, ensuring returns from agriculture investments are driven in the long term by event not correlated to financial markets, and those choosing agriculture investments as a store of wealth are best positioned to benefit from these trends over the long-term.