As the investment climate continues to dictate poor returns on cash, volatile equities and high inflation, investors are turning to alternative investment assets in an attempt to sure up portfolios, replace languishing income streams and rebuild capital growth, whilst at the same time looking for growth that is driven by fundamental changes in the shape and size of the global population and economy.Many investing legends such as Jim Rogers and Jeremy Grantham have backed agriculture investments as the most effective asset class to meet these needs in the long-term. Billionaire investor and philanthropist George Soros – the man responsible for crashing the UK currency in 1992 making over $1 billion dollar in the process – went so far as to say that he is “convinced farmland is going to be one of the best investments of our time.” As institutional investor begin to expand their knowledge within the agricultural sector and understand the fundamental trends that drive returns, more and more institutional capital is being allocated to this under invested asset class.Some of the fundamentals that drive returns in agriculture investments and attract capital include:Population Growth – U.N. estimates project the global population will swell to 9.2 billion people by 2050, an astonishing increase from the current figure of 6.9 billion. The lion’s share of this growth comes from developing nations, where at the same time increasing wealth dictates greater consumption of food and energy per capita. The U.N. predicts that agricultural production will have to increase by 70% to meet future food and fuel demand.
Rising Incomes – In developing nations, especially in Asia, incomes are rising rapidly. And as people become wealthier, their eating habits change to accommodate more a more protein richer, meat-based diet. In China alone consumption of meat has risen from 20kk per person in 1985, to 50kg per person in 2000, with many analysts reporting projections of 85kg per person by 2030. Taking into account this one country alone has a population of 1 billion, and the fact that 1kg of meat requires the input of around 8kg of grain to produce, the strain on global grain production is significant and growing.Biofuel use – The use of biofuels as a replacement for traditional crude oil is driven by legislation in many countries, with international targets to generate clean energy for a substantial portion of overall energy production, in turn driving demand for feed stocks and land required to produce them, in 2008 for example, 25% of US corn crops went into biofuel production. Institutional investors have projected that almost 250 million acres of farmland will be required to meet biofuel production targets in the US, EU, Japan and the BRIC economies of Brazil, Russia, India and China. To put that into perspective, that would require 505 of the current farmland existing in North America, and around 6% of the total global supply of productive farmland.Loss of farmland – We lose farmland every year to urbanisation and climate change, and many global authorities have warned that we are losing quality land at a much greater rate than we are replacing it. The United nations for example have said that we are losing good quality topsoil around 10 to 100 times faster than it is being replaced.Water security – Much farmland requires irrigation to produce commercially viable yields, in the US, only 13% of farmland requires irrigation yet this small percentage consumes over 40% of all the country’s water resources. In China, over 40% of farmland requires irrigation, using up to 90% of the eastern giant’s fresh water. There is very little water resource left to expand irrigated production of food.Death of the green revolution – The introduction of herbicides and fungicides in the 1970′s, known as the green revolution, allowed growers to increase agricultural yields through the application of nitrogen based fertilisers, and although yields have increased year on year for decades as a result, with an average annual increase of over 2% for 40 years, this has not led to a surplus in global grain stores, and since the year 2000, annual yield increases have fallen to less than 1%, less than the rate of global population growth.
Institutional investment – Pension funds, hedge funds and other institutional investors manage global assets in excess of $23 trillion. Since 2000, pension funds have increased investment in farmland and commodities from $6 billion to $320 billion, with a further $100 billion in agriculture investments from hedge funds. This still represents tiny fraction of the overall wealth of the institutional community of about 2%, with the vast majority of industry analysts projecting that this figure will rise to 5% by 2015. This huge demand for prime farmland assets is likely to support higher land prices in the short term, whilst other fundamental drivers support long term growth.All of these factors cover to drive returns within the agricultural investment sector, regardless of the wider performance of traditional assets such as equities.Those considering agriculture investments should seek consultation from experienced agriculture investment consultants capable of identifying and delivering primes assets and on-going management through locally experienced farming enterprises.