Many investment professionals, including the legendary Jim Rogers, believe agriculture commodities are only in the early-to-middle innings of a major “super cycle” of increasing prices. The argument for this is fairly simple. The number of people in the world is increasing, and projected to reach nearly 9.1 billion by 2050 according to the United Nations. Meanwhile, the amount of arable farmland has been decreasing.
In addition, as with many major trends in the world today, a large reason behind the rapid run-up in food prices is China’s development. As investors we always want to be on the correct side of global macro trends, and whatever China needs or is buying lots of, we want to own as investments.
The question is what are the best ways for making money from the agricultural sector? One way is to invest directly into agriculture stocks such as farm equipment maker John Deere (DE), global seed giant Monsanto (MON) or fertilizer company Potash Corp of Saskatchewan (POT). Another method is to invest in agricultural futures through Exchange Traded Funds (ETFs) such as AIGA on the London Stock Exchange or DBC in the US which tracks an entire basket of agricultural commodities including corn, soybeans, wheat, cotton, sugar, coffee, cattle and pigs. These commodities ETFs try to track the spot price of the various commodities they include.
The advantage of these stocks or ETFs is that they are easily trade-able by anyone who has an online brokerage account. The disadvantage, however, is that they are still financial instruments, and as such can fluctuate widely in price.
One option most individual investors tend to overlook is direct investment in farmland. In many ways, a farmland investment is more secure, stable and tangible then putting money into stocks. Farmland allows investors to still benefit from the global trends in agriculture we have discussed, whilst providing much greater stability then agriculture stocks or commodities which can fluctuate wildly.
Just to take one example, in the last 20 years farmland in the United States has never had a down year according to the National Council of Real Estate Investment Fiduciaries (NCREIF) in the US demonstrates. Not surprisingly, many large institutional investors have been investing heavily in farmland the last several years. For example TIAA-CREF, one of the largest pension funds in the world, has recently made a large move into farmland investing.
Prices for farmland in the West – particularly in Europe – have already moved up considerably, reaching as high £17,300 per hectare in the northwest of England to take just one example. Whilst there are considerable advantages in terms of political stability to farmland investment in Europe or the US, the real opportunities for spectacular gains lie in emerging markets, especially in Africa, which holds 60% of the world’s remaining arable land suitable for farming.
Whilst farmland investment has been dominated by larger institutions historically, in just the last two years a number of options have been developed for individuals. The most common is to pool a number of individual investors’ capital together to purchase a large parcel of land, and then divide it into individual freehold parcels. Farmland investments for individuals generally pay a regular yearly dividend from the sale of crops, and also provide the opportunity for long-term capital gains as farmland continues to increase in value.
We are now starting to see options starting as low as £1,950/hectare for high quality farmland in Africa, making it easily accessible by individuals and a great way to diversify. There are, of course, risks with any investment, but by doing one’s due-diligence and investing in the right structure with the right people and institution, farmland investment can be both safe and profitable for individual investors as well as large institutions.