An expanding population, scarcity of resources and a changing climate happen to be three trends that define current times. Alone, each factor constitutes a major issue, but when combined and intertwined as they are, they become all the more serious. As time passes, the paths of these factors will become all the more linked and their effect upon the global economy will become ever more pronounced. Sectors at the nexus of this coming together offer investors the best prospects for capital growth and income in the short, mid and long-term.
The agricultural sector is perfectly positioned to take advantage of these fundamental changes in demand for food and our apparent inability to deliver it. Demand for agricultural commodities is ballooning, and will continue to do so as demand for food from an extra 75 million people per annum, a shift to high protein diet in developing nations, and the use of food crops as an energy source by way of biofuels drive fresh demand. Yet at the same time increasing our ability to supply these commodities is diminishing, a fact that can be blamed on a multitude of factors including climate change, a definite lack of further farmland and diminishing yield increases from the green revolution.
Production of grains, as measured on a per capita basis, started to decline around the mid 1980′s and the availability of agricultural land per person started to fall in the very early 1960′s.
Two years ago In 2008, grain stocks were at their lowest level for over four decades and resulted in the biggest spike in agricultural commodity prices since records began.
Of course we saw these price correct themselves towards the end of the year, Yet since then price have continued their rising trend despite the recent financial crisis reigning in demand. The global food supply sits in a precarious position, pressured from above and below by both increases in real demand and limits to increasing supply.
It could therefore be argued that the land that is capable of producing such commodities will become a more valuable resource as time passes. It is then safe to say that Investors savvy enough to look at agriculture investing by way of investing in farmland will be best positioned to take advantage of this supply and demand mis-match.
Here are the facts:
The global population expands by over 200,000 people daily.
The current population sits around 6.7 billion people and there are approximately 1,402 million hectares of farmland, 138 million hectares of perennial agricultural land and 3,433 million hectares of meadows or what could be termed pasture to feed this amount of people.
The grand total of food-producing land on the planet amounts to about 4,973 million hectares. this means that each person on the planet has about 0.74 hectares when you include all types of agricultural land. Bear in mind that this land must also continue to produce all of our cotton and rubber, as well as every ounce of grain and meat, and grain to feed the meat, and the biofuels that we all require.
These calculations lead us to conclude that, based on current levels of agricultural productivity, we require an extra 148,460 hectares of land every single day to feed the 200,000 or so new mouths to feed. This equates to a total area of land, solely to grow crops, that is approximately the size of Greater London, or 100% larger than New York City, Tokyo and Singapore combined.
The real picture is alarmingly different, where we should be adding a huge amount of land to agricultural production on a daily basis, we are in fact reducing the amount of land available for agricultural purposes and for the last three years the total area of farmland has diminished substantially.
These numbers demonstrate dramatically the challenges posed to feeding an ever-expanding population with a strained farming base. This has led to sharp increases in farmland prices across the world and the value of good quality agricultural land is driven by rising demand and diminishing. To be more specific, continued rising demand for the commodities produced by farmland, i.e. food, will continue to drive values higher, whilst at the same time, restrictions on expanding the amount of farmland place a downward pressure on supply, again pushing up values.
It is a complex picture with many factors to measure and take into account. As commodity prices rise, demand for land increases, and supply also rises if more land is brought to production. At the same time, if yields increase then less land is required, but if production capacity is lost, as we are more often witnessing due to climate change, urbanisation and land degradation it is more likely that more land, which is not available will be needed, therefore existing farmland becomes more valuable and prices rise.
Farmland investment should be viewed at worst as a mid-term strategy and ideally as a long-term hold, but understanding the short-term fundamental drivers such as commodity prices allows the savvy investor to identify the best opportunities to purchase. The objective of the Investor should be to clearly understand the longer term trends, thus empowering the investor to make the correct decisions.
It is my opinion that investing in farmland will provide the investor with by far the best opportunity for mid to long-term capital appreciation and sustainable income. Choosing the right market in which to invest should be a decision taken based on the current pricing of the asset compared to its true value.
A lack of credit and depressed market sentiment are also playing a role in presenting off-market opportunities for investors to acquire assets at good prices, and a very simple analysis of the revenues generated from a farm, minus production costs, will tell the Investors if that land is good value. If one were to buy farmland in the UK at today’s average price of around £14,000 per hectare, we know that we could grow 7.5 tonnes of wheat and sell it for around £160 per tonne creating a revenue of £1,200, minus production costs of about £300, leaves a net annual income of £900 for a £14,000 investment, equating to an annual return of 6.4%. Buy farmland in south America for $4,000 per hectare and your ROI shoots to around 16%, and in Australia you can buy land so cheaply right now that you could return an income equivalent to 40% annually.
Many opportunities exist for private investors to take advantages of these trends without taking on the complex operational responsibilities associated with farmland ownership. For more information on farmland investment opportunities available for private investors, contact David Garner at DGC Asset Management.