Investing in Sustainable Agriculture
It's often overlooked because it's not particularly sexy to mainstream investors, but there is huge opportunity in global farmland and sustainable farming.
You see, global population growth has increased at a staggering rate over the past century, with an increase of one billion in the past decade alone and a projected world population of nine billion people by 2050. Yet today’s global food production continues to leave over a billion people undernourished.
The proliferation of a new middle class with an increased purchasing power in emerging markets, coupled with a shift in dietary trends, has increased the demand for meat.
This global population growth and an increasing reliance of the global livestock industry on grains for feeding its livestock has, in turn, led to an increased demand for grains that will continue to trend upwards.
Add to that the millions of acres of land lost to urbanization every year and the negative impact of extreme weather events, soil degradation, water scarcity, and rising temperatures on agricultural productivity, the increase demand for biofuels, and the “finite” nature of arable land to meet this ever-increasing global demand, and you’ll begin to understand why global farmlands — a prime asset — continue to be an attractive investment on a global scale.
Farmland investments are quite an attractive alternative or supplement to stocks. They can serve as a great hedge against inflation, and their performance doesn't correlate directly with the stock market.
Farmland values across the globe have increased up to 1,800% over the past decade, with countries like Romania, Hungary, Brazil, Argentina, and Poland recording the highest percentage of increases in farmland values between 2002 and 2011.
Truth is, farmland continues to outperform residential and commercial property investments in many places across the globe.
Take Brazil, for instance. According to research from São Paulo-based consultancy Informa Economics FNP, the value of Brazilian farmlands has quadrupled over the past decade, outpacing inflation and matching gains by the São Paulo blue chip stock exchange.
When you take into consideration that the Brazilian crop areas are forecast to increase from 62 million hectares in 2010/2011 to 68 million hectares by 2020/2021, potentially expanding Brazil’s crop and livestock production by a factor of three, it becomes clear why Brazil continues to be a hot spot for farmland investments.
When visiting Asia this past October, I found that the Chinese interest in global farmland was evident, with high net worth investors as a top target.
Given that China’s population of 1.3 billion consumes approximately 20% of the world’s food and the country only has 9% of the world’s farmland, I foresee a continued upward trend in investments into global farmland by Chinese investors. This trend will affect the globe much in the same way the Chinese real estate investor has.
The U.S. farmland investment horizon is also promising. According to the Oakland Institute, a California-based think tank with a focus on agriculture, $10 billion in institutional capital in the U.S. is looking to purchase farmland over the next 20 years.
And as the current generation of U.S. farmers retires, an estimated 400 million acres of land will be up for grabs, creating ample opportunities for investors (although it should be noted that these investors will see competition from real estate developers).
Like any other investment, how you decide to invest in global farmland — whether you do it directly or through a managed investment vehicle — will depend on your appetite for risk.
My recommendation to risk-averse investors is to consider buying highly productive, arable farmland and leasing it back to the farmer. You can also take advantage of a business model that involves sharing a percentage of the revenues (or losses) with the farmer operating the land.
It goes without saying that the key to minimizing risk is a thorough due-diligence process, local knowledge, and an understanding of the underlying geo-political structure, currency fluctuations, and regulatory environments of the region you invest in.
Given the myriad of global challenges we face — from rising population growth and the global food crisis to climate change, soil degradation, water shortages, increased energy costs, and declining returns from the use of chemical fertilizers — I am particularly optimistic about investments in sustainable farms.
Sustainable farms that focus on practices built on the science of agroecology, preserving our resources, protecting the soil, increasing biodiversity, and eliminating pollution ensure that future generations can continue to reap benefits and meet their dietary needs.
I believe that in the long run, the fundamentals continue to be positive for owners of highly productive farmland, and economic indicators support projections of continued growth in both farm income and land values.
Owners of quality farmland with a sustainable approach to farming based on economically viable, environmentally solid, and socially beneficial principals that not only benefit the farmer, the land, and the community, but also create sustainable returns, are poised to benefit from the global trends.
This kind of land will continue to attract both institutional investors and high net worth individuals looking for a safe haven and a means to diversify their portfolios.
We'll have more on some of these opportunities next week.
Global Real Estate Consultant
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