The fundamental facts, which point to a continuous appreciation of farmland values are overwhelming.
Reduction of arable acres per capita
In 1960 we still had 1.2 acres of arable farmland to produce the food for one world citizen. Arable acres have been shrinking since a long time due to urbanization and environmental damage. During the same time the world population has been growing. Our farmers will need to produce all the food for one human from 0.5 acres in 2020.
Increase in food consumption
Current world population of 7 billion is expected to grow to 8 billion within the year 2025. But food consumption will outpace population growth. A fast growing Asian middle class is switching their food consumption from rice to a more balanced nutrition, which is higher in animal protein and dairy products.
Low correlation between food prices and farmland values
Historically farmland prices have hold up or even increased during periods when prices of key commodities like wheat, corn and soya where stable of falling. This indicates the low downside risk of farmland.
– Chart of food price and chart of Australian land values-
Farmland as a perfect diversifier in a financial portfolio
The value of farmland has hardly any correlation with the swings in financial markets. An investment in farmland will reduce volatility in a financial portfolio, making it more efficient. Risk adjusted returns from farmland beat most other asset classes.
– Correlation matrix of farmland and stocks-
Farmland is under-owned
Most farmland is still owned by the farmer, who operate the farm. Farming is most likely the last business, where the assets in form of real estate and the operation is owned by the same party. Hardly any supermarket or bank owns the buildings they operate in.
We expect this to change over the years. Farmland as an asset class for institutional investors is only being discovered. The very small amount of land owned by investors will increase in the coming years. Investors often have a lower yield requiremnt than a farmer. They will bid up prices until yield have reached this lower threshold.