Every day, 30,000 hectares of agricultural land are lost to urban spread, climate change and a range of other factors, while a net 200,000 is added to the world’s population.
“We now have access to top class farmers who in the recent past would not have given us a look in and they are the ones offering excellent returns.”
Detlef Schoen
Meanwhile, life expectancy in many developing countries is catching up with that in the developed world, causing a further demand for food. Furthermore, as the billions living in developing countries grow wealthier, the demand for meat in particular will rise. It is these powerful macro trends which are driving the growing popularity of farmland as an investment.
Feed the world
Despite the rapid loss of farmland we are witnessing today, the fact that total farmed crop land has failed to keep up with the pace of population growth is not a new trend: farmed acres have increased by only 20% in the last 50 years to 900 million hectares (equivalent to 2,250 million acres), while global population has grown 120% over the same period. Consequently, the total number of people supported by each acre of land has risen from seven people to nearly 12 people over that time period. This scarcity of supply is one of the key factors behind the growing interest in farmland investment. Not only are they not making any more of it, but what we do have is disappearing. Another development is the reluctance of sons and daughters to take on the family farm, with a growing number opting for alternative (and perhaps easier) careers instead. Research suggests less than half of farmers in the developed world have identified a potential successor, leading to a wave of merger and acquisition activity between farms that needs to be financed. A scarcity of bank lending however, means farmers are now turning to investors they would have ignored just a few years ago. “We now have access to top class farmers who in the recent past would not have given us a look in and they are the ones offering excellent returns,” says Detlef Schoen, managing partner, farm investments, at Aquila Capital. “For an investor, the danger is to not pick the right farms – the top 25% are about 50% better than the rest.”
Room for growth
Several large institutions now invest in farms, including sovereign wealth funds such as Temasek and the China Investment Corporation. More are expected to follow. Research by alternative investment manager Aquila Capital suggests 23% of UK and European institutional investors are looking to increase their exposure to farmland over the next 12 months, while 11.4% are planning to invest in the asset class over the next five years. Aquila, which manages a specialist fund investing in milk production in Australia, added the asset class still accounts for only 1.3% of investment portfolios and only 17% of investors have an allocation at all, so there is plenty of room for growth. Tim Hornibrook, executive director of global agriculture, at Macquarie Agricultural Fund Management, also believes the time has come for farmland to appear more regularly in institutional portfolios, despite the lack of investor experience in what can often be a complex asset class. “You could argue investing in farmland has been going on for more than 10,000 years; we’re personally dealing with an investor who has invested in it for 800 years. But this is such a nascent asset class for institutions and when you look at institutional managers there is no real track record of exiting assets,” Hornbrook says. “Yet the potential returns hold up well against other alternative asset classes when compared on an unlevered basis.”
Learning curve
Mistakes have been made with farmland in the past, but managers are increasingly changing their view on the asset class. Agriculture is no longer regarded as a risky, high return private equity investment, but rather a far more conservative, yield-driven strategy. “The first wave of investors into farms over the last 15 years was often left disappointed because they had the wrong managers in the wrong geographies with a misalignment between asset managers and farmers,” believes Aquila’s Schoen. “Many banks still demonstrate their ignorance of the fundamentals of profitable farming, making the mistake of treating farms as pieces of real estate rather than businesses.”
Reaping the rewards
Investors do not need to buy the farm in order to reap the benefits of this trend: opportunities exist in infrastructure firms building transport links to and from farms, while investors with a need for liquidity can choose to back listed companies that provide supplies such as machinery, chemicals and fertilisers. But for those willing to invest directly, the yields can be decent. Aquila’s specialist investment fund, which focusses on Australian milk farms, is projecting pre-tax cash returns of 4-6%pa as part of a double digit overall internal rate of return. As Macquarie’s Hornibrook points out, farmland is probably one of the most fragmented sectors globally and is dominated by small-scale family producers. But it is often starved of capital and the asset class has the potential to grow into a $1trn+ giant. “There is really only between $40-$50bn of institutional capital that’s been allocated to farmland thus far, but it has the potential to grow to over $1trn. Now, not all of that $1trn is going to be investible, but the forestry sector, was only a $2bn sector globally and just about all of that is invested. So there’s a huge opportunity for investing in global farmland today.”
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