In ancient times, wealth was generally invested in precious metals, farmland, livestock and slaves.
Moving forward to today, the world has changed a lot, but two investment classes have withstood the test of time. Livestock are now considered as working capital in a meat enterprise more so than as an investment. Given the rising importance of compliance officers, it is quite difficult to receive approval to invest in slaves nowadays. This leaves us with gold and farmland.
Gold vs. Farmland (Real Assets)
Both gold and farmland are ‘real assets’ with inflation protection characteristics. However, farmland has the added advantage of producing a regular yield.
Farmland Investments Total Returns (Yield)
Farmland total return indices show this investment class produces returns close to the returns produced by international equities These returns are achieved with a fraction of the price volatility.
Gold vs. Farmland (Real Assets)
Institutional Farmland Investments
Institutional investors and large pension funds base their investment decisions on historic returns, volatility and correlation. If you prefer this mathematical approach to building an optimal portfolio, you would conclude that farmland needs to be a significant part of any institutional portfolio. However, the reality is, there is only a small percentage of farmland owned by institutions.
Agriculture- Institutional farmland investment
Pension funds farmland investments
Pension funds from Canada and the USA are leading the trend towards including farmland as a valuable portfolio addition. Farming operations in these countries are more advanced and professional than in many other countries. Farmers in Canada and the USA understand that in order to be a successful farmer you do not need to own all the land you farm. Leasing additional farmland, increasing the size of the operation thereby increasing efficiency, lowering unit costs, creating a future for the next generation, are all reasons why farmers are increasingly interested in leasing farmland. By leasing additional farmland, farmers can allocate capital to their working operation rather than having it tied up in land ownership.
Pension funds farmland investments USA & Canada
Canadian and US pension funds have a significant presence in the Australian farmland market. The lack of language barrier and a similar legal system are two reasons why they like investing in Australia. The Australian Government welcomes investment in farmland from the big pension funds because they are aware that there is more demand from potential lessees than land for lease available.
We are convinced that this trend will continue. Moving forward, more and more farmland will be owned by investors. This has already occurred in commercial and residential real estate markets and we believe farmland will head down a similar path.
Farmland Investment Yields
Investors accept a lower yield than an operating farmer. This means institutional investors will bid up prices higher in the coming years. The early investors will capture this revaluation gain, which will only occur once.
Farmland Investment European Pension Funds
European pension funds are missing the trend. In many European countries there is a left leaning view that investments in farmland is akin to “land grab”, where some poor families are chased away from land the live on but do not own. We do not have the knowledge to comment if this happens in other countries or not. But we do know that investors who buy farmland in Australia and lease it to local farmers are very welcome.
The agriculture investment thought process
- Is Agriculture an interesting asset class?
- What is the optimal way to gain exposure this asset class?
- Which continent offers the best return for least risk?
- Do I want to take on operational risk?
- Who is the best team to develop and implement my agricultural investment Who is the best team to develop and implement my agricultural investment
Agriculture as an asset class is a real with capital protection characteristics and manageable downside risks
|Region||2001-2011 returns p.a||Standard deviation|
Real asset with capital protection characteristics and manageable downside risks
- Capital protection during market turbulences
- Downside risks are limited by the underlying land prices that have been remarkably stable
Farmland Investments Portfolio Diversification
- Low correlation with traditional asset classes (e.g., stocks, bonds)
- (In the USA) slight positive correlation with commercial real estate
Farmland Investments Sustainability
- Environmentally positive, sustainable, and “green” investment (provided that the implementation is adequate)Environmentally positive, sustainable, and “green” investment (provided that the implementation is adequate)
Total Return of Farmland Investments: Income and Capital Gains
- Total return is a combination of recurring income (agricultural operations) and capital gains land price appreciation)
Farmland Investments Inflation protection
- High positive correlation with inflation