Everyone has to eat in order to survive and the production of almost all food can be traced back to farmland around the world in some way. Demand is growing for farmland as the world's population and global needs for food increase. What many don't realize is that the supply of farmland is not changing, thus creating a severe imbalance in the supply and demand of farmland.
An investment in farmland over the long-term will provide a steady stream of income and capital gains due to the increasing global demand for agricultural commodities, driven by the rising world population, rapid growth in emerging markets, and continued demand for ethanol and biofuels. Demand for agricultural commodities is outpacing supply, positioning farmland for long-term appreciation.
In brief, the following factors are important in driving the fundamental investment rational for farmland investments:
Cash Returns – Farmland is a performing asset, generating modest cash returns of 4-6%, depending on location and crop.
Land Scarcity – There are approximately 3.5 billion acres of arable land in the world with the potential for adding a mere 20% over the next 20 years.
Food Demand – As incomes rise, demand for proteins will increase with corresponding increases in the need for feed grains. Demand is growing in developing countries: The USDA expected exports to rise up to as much as $167 billion in 2021 from $82 billion in 2007.
Bio-fuels – Agriculture and energy markets are now bound together by federal mandates for renewable fuels. The USDA estimates that 40.5% of the U.S. corn crop was used for ethanol in 2011 and 43.1% was used in 2013.
Declining Inventories Worldwide – Inventories of grains, as measured by “Stocks to Use” ratios have been trending down in many countries. In the U.S., there is a roughly 35-day supply of corn. In China, declining stocks has created the potential for increasing imports of corn.
Low Farm Sector Debt Levels – The U.S. farm sector has a healthy Balance Sheet. Current debt to assets ratios are at 40-year lows and 78% of Iowa farmland is free of debt.
U.S. Infrastructure – From transportation and storage networks to the stability of Government programs and the know-how at U.S. universities, the U.S. farm sector has the ability to grow and efficiently market large volumes of feed and foodstuffs.
Inflation Hedge – Many economists expect inflation in the longer term as large federal deficits and the Federal Reserves’ easy money policy will create conditions for high inflation. Farmland is highly correlated to inflation and negatively correlated to most other financial asset classes.
Resource Conservation – Agriculture production must be managed as a sustainable resource to feed the world’s growing population. Water is a vital resource and is a limiting factor for irrigated agriculture throughout the world.
Sustainable Asset – Farmland improves in productivity over time when well-managed.
An investment in farmland provides investors an opportunity to diversity from traditional asset classes as farmland returns have been negatively correlated with equities and bonds. These characteristics make it an excellent diversification tool that can balance a portfolio and offset financial and other real estate market volatility.
Farmland is frequently compared to investments in gold because of its characteristic as an inflation hedge. However, unlike gold, farmland also produces stable income streams and as a consequence it has been described as “gold with yield.”
Farmland is a long-term investment that will be the key to feeding the world’s growing population. Farmland is the one ingredient in food production that cannot be replaced and is a sustainable asset that will last many generations.