As stock portfolios project to spectacle volatility, many investors are now starting interrogate alternative investments, with one area of particular interest being agriculture investments, or specifically farmland investments.
I think it is now particularly relevant to say bring up that oft - used and scarcely heeded piece of investment advice; " Past performance is no guarantee of future performance and investors should of course be cautious in the use of historical data when making investment decisions. "
Now the reasons for investing in real assets that produce essential wares in perpetuity are sound. Population growth and rising incomes drive demand, whilst urbanisation, water scarcity, climate change and a host of other factors suppress supply, and these two fundamental trends stack up to drive up food prices and with them, farm revenues and the important value of farmland assets.
These, in my assessment, are the reasons to set up in agriculture, and although history and hindsight can demonstrate how these assets and markets have performed during certain conditions, the wise investor should perhaps look to the future, rather than the past to ascertain the likely performance of their holdings.
As witnessed recently in equity markets across the globe, the time frame used to provide data for predicting future events, is crucial. Rather than simply use the longest data set available, one is better positioned perhaps to use data from periods in time where economic conditions are most likely to be characteristic of future conditions.
A good example that has relevance to agriculture investments is the depression of commodity prices during the 1980 ' s, where a reduction in demand for food from developing countries resulted in the accumulation of large grain stocks. If you feel that in the future, demand from developing nations is likely to fall, then data from this period would be most relevant to use to project future commodity prices as you believe the same set of conditions will prevail. In this set of circumstance and taking this set of data, you would project that commodity prices and farmland prices would fall.
If you believe that demand for commodities such as food will continue to grow, as it did in the 1970 ' s, then you would expect commodity prices and farmland prices to rise as they did then, based on the assumption that the same set of circumstances in terms of supply and demand will ultimately prevail. Using this piece of historical data alone would lead you to believe that agriculture is a strong buy, and farmland investment assets will continue to rise in value.
Again, when making your own decision as to whether you feel farmland values will rise or fall ( they will surely do both over time ), you should base your answer on whether you feel that demand is likely to increase, and whether we have the capacity to increase supply accordingly. The answer to these questions lies in the present, not in the past and one could simply ask three very simple questions:
Will there be more people on Earth in 10, 20, 30 or 50 years? Is there more land to produce crops to feed this excess? If not, can we increase the amount of food we grow per hectare?
It is the answer to these questions that should define your opinion on asset values in the agricultural sector, standalone facts and statistics form the past.
