Agriculture Investment - How to Value Farmland for Investors

There are many factors to consider when approaching the valuation of an asset; the relationship between supply and tangible demand, the availability and affordability of credit to enable this demand, the earnings generated by the asset and the cost of generating that income. However, as with division asset, Investors should primarily consider the price to earnings ratio of farmland to distinguish the cost of each unit of income.

The value of commercially viable agricultural land is persevering primarily by the profitability of the land as a begging, income generating asset. The greater the income yield generated from the sale of crops, the higher the value of the land from which that yield is derived. This part is the absolute key for both farming landowners and financier landowners. Occupant farmers will be prepared to recompense higher rents on land where a greater income can be earned and investors will be prepared to pay a higher price for land where the income generated is higher.

The profitability of farmland can be measured tidily by deducting the combined cost of ownership ( mortgage interest ), and of production ( manpower, fuel, fertilizers seed etc. ), from the revenue generated by way of the sale of the crops produced. It should therefore be noted that agricultural device prices play a crucial role in ascertaining land values. It is the influence of agricultural products that have to a great extent generated the recent gains in farmland prices in the UK, particularly during 2007 and 2008 when wares were experiencing unprecedented highs. There are of course a quantity of other factors at play but a pure capitalist should glad eye mainly at earnings and costs for a picture of the real value, regardless of entreaty prices. Using this chemistry also quickly identifies over - pricing where the cost of ownership and production are close to, or outweigh income.

Supply also affects farmland values, and in areas where there is a high level of availability prices are likely to be lower than in areas where availability of good land is suppressed, either through a lack of sellers or an actual lack of existing land. In any agricultural economy the highest yielding land is taken into production first as it is the most profitable. Where profitability of the land in two different areas is similar, the availability of farmland explains much of the variation in prices.

A good example of this can be witnessed in Canada where despite a large availability of land ( 6. 5 million km2 ) only a small proportion is able to produce premium agricultural yields. Demand for this more profitable land will be highest and it will be the most valuable, whilst less productive land will be less valuable. This makes agriculture investment in Canada tricky for those unfamiliar with the farmland market although there are a number of good farmland investment funds with locally experienced operators.

Outside of this apparently simple relationship between farm profits ( or rents ), farmland availability and farmland values, one must also factor in the price of the commodities produced, which are also set by supply and demand. Therefore, to make a qualified projection of future farmland values, one must also have a clear understanding of trends in agricultural commodity prices.

Soft - commodities are cyclical in behaviour, and a greater global supply of say Soy, will drive the price down as it is freely available. There is then a clear economic disincentive for farmers to grow Soy the following year and therefore global stocks fall and the price rises again. These higher prices incentivise further investment in production and the cycle begins again. Other factors also play a part such as an abrupt shock in supply caused by drought or export bans from major producers. We witnessed a recent example of this in late 2010 when Russia halted their exports of wheat, creating a global shortfall and a short - term spike in the price.

This short - term cyclical volatility in soft - commodities makes it difficult to assess farmland values in the short term as it is mostly production levels that have an influence, but the mid to long - term fundamentals of the supply of, and demand for commodities are much more important to the farmland investor. Capital growth is reliant upon long - term agricultural commodity trends rather than short - term price volatility. It is the long - term fundamentals of food demand growth and food supply constraints which have resulted in a historical upward trend in agricultural land values.

On the most basic level, the global population continues to grow at a rate of 200, 000 per day, and is due to peak at 9 billion in 2050. This tells us that long - term demand for food will remain not only strong, but at current levels of production, totally unsupportable, therefore the value of the land that produces our food must rise.

Agriculture Investments - The Effect of Population Growth on Farmland Investments

It has been duly noted time and again that population growth is a key driver in demand for food and other agricultural wares including feedstock for biofuels and biomass. As demand for lines grows, and supplies do not increases, prices rise and competition for existing produce increases. This bodes well for those in control of productive agricultural land as not individual do incomes from harvesting crops increase, so awfully do does the important value of the land on which they are grown.

In this brief article we will regard at the facts surrounding population growth and the likely impact on the performance of agriculture investments, with particular bias towards farmland as an alternative investment asset class.

Monday 31st October 2011 marked the birth of Danica May Camacho in the Philippines. At 5. 5lbs, Danica May is a tiny person that represents an enormous global milestone as she was chosen by the United Nations to symbolically mark the global population reaching 7 billion people.

In fact, the human population has increased by almost 400 % in the past 100 years alone with a net increase of 225, 000 new people per day during the last decade. Currently, more than 5 % of the total number of people that have ever lived are alive today, and over 1 billion people have been added to the global population in the last 12 years. On current trend, the global population is projected to be roughly 40 % higher than today by 2050 ( UN Population Division, 2007, UN 2006 population revision ).

To put this in perspective, this is the equivalent of adding the total population of Greater London ( 7, 556, 900 people ) to the world ' s headcount every month ( Wikipedia, 2011 ).

Whilst a range of scenarios and population forecasts exist, it is widely agreed that growth in demand for grain will double in the run up to 2050 and that the impact on food prices will be substantial ( UN Environment Programme Rapid Response Assessment, 2009, The Environmental Food Crisis: The environments role in averting future food crises ).

At the same time as demand is increasing, our ability to meet that demand with produce is diminishing every year. Put simply, the vast majority of suitable land is already being cultivated, with very little remaining to expand land under cultivation, and at the same time, soil degradation, urbanisation and water scarcity all combine to prevent further increases in production.

In summary, agriculture investments based on the identification, acquisition and operation of productive agricultural land offers Investors the opportunity to decorrelate a portion of their portfolios from financial markets, and capture both growth and income that is fuelled by undeniable demographic trends rather than the dynamics of financial markets.

Agriculture Is Booming - Don ' t Overlook Adding Farmland Investments to Your Portfolio

Many investment professionals, including the chimerical Jim Rogers, suppose agriculture wares are matchless in the early - to - middle innings of a higher " super circuit " of increasing prices. The argument for this is fairly smooth. The unit of people in the world is increasing, and projected to reach halfway 9. 1 billion by 2050 according to the United Nations. Meanwhile, the amount of arable farmland has been decreasing.

In addition, as with many chief trends in the world today, a sizeable reason late the rapid scuttle - up in food prices is China ' s development. As investors we always fancy to be on the correct side of global macro trends, and whatever China needs or is buying lots of, we need to own as investments.

The matter is what are the best ways for making money from the agricultural sector? One way is to originate 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.

Farmland Investment Performance in Europe - 2011 - 2012

Farmland values across emerging economies in Europe prolonged to perform well during 2011 as increased capitalist appetite for productive agricultural assets, as well as active agriculture investment policies from of China and Arab states who are interested in bolstering food security has provided stable short - term pricing support.

Throughout Europe there is meager data available to effectively measure the performance of farmland investments; one must for rely on anecdotal evidence supplied by land agents and agribusinesses in the region.

There remains substantial growth potential in the region; in Romania for exemplar, which joined the EU in 2007, farmland can be bought for around 2, 000 - 2, 500 per hectare - up to 40 times cheaper than in parts of Western Europe. ( Daily Telegraph, 2011, Rich pickings from Eastern Europe ' s farmlands ).

According to Valeriu Tabara; Romanian Minister of Agriculture and Rural Development ( MADR ), foreigners currently own more than 700, 000 hectares of agricultural area in Romania, representing 8. 5 % of the total arable land.

" The agricultural land owned by the foreigners in Romania at the moment is more than 700, 000 hectares, with Italy having 24. 29 % of the surface, Germany 15. 48 % and the Arab countries, 9. 9 %. The request to buy agricultural land is a developing phenomenon, " Tabara said.

According to the data revealed by the minister, other countries with significant farmland investments are Austria with 6. 13 %, Spain with 6. 2 %, Denmark with 4. 25 %, the Netherlands with

2. 4 %, Hungary with 8. 17 %, Greece with 2. 4 % and Turkey with 0. 78 %, whereas Malta, Cyprus, Monaco, San Marino and Luxembourg have acquires 5. 91 % of Romania ' s agricultural land through offshore companies. Land owners in Iraq, Lebanon, Syria and Iran are present from the Arab world.

In a recent paper published by Institute for Economic Research and Policy Consulting, farmland values in the Ukraine were assessed using the income capitalization approach to farmland price estimation. Based on the actual land productivity ( gross margins ) for Ukrainian farms over the period of 2007 - 2009, researchers found that a hectare of arable land would be traded from 1500 UAH ( Zakarpattia ) to 5500 UAH ( Kirovohrad ). If the sub sample of top - 25 % performing farms was to be considered, the maximum land value will increase to around 6800 UAH or $860 USD ( Oleh Nivevskiy & Serhiy Kandul, 2011, The Value of Farmland - Expected Farmland Prices in Ukraine after lifting the Moratorium on Farmland Sales, Institute for Economic Research and Policy Consulting ).

It is widely expected that farmland values in the Ukraine will continue rise as the number of investors keen to access the productivity potential of the country ' s black earth rises

In recent years there has been a proliferation of investment schemes based on the cultivation of Ukrainian farmland, with one scheme collapsing entirely and another offering land parcels for an extortionate price of $2, 325 ( USD ) per hectare. This represents a potential ' land - banking ' style mark - up of 1, 130 % at worst, and 170 % at best.

Elsewhere in the region, a hectare of agricultural land in Hungary, Poland or the Czech Republic is priced between 5, 500 and 7, 000 demonstrating a continued upward trend in values throughout 2011.

Farmland Investments in Africa - Can They Be Both Profitable and Sustainable

As global stock markets delay wildly, individual investors, private equity funds and other mammoth institutions are increasingly looking to alternative investments to store account and stability to their portfolios.

Addicted the rapid scuttle - up in agricultural produce and food prices recently, farmland investments are becoming an increasingly attractive asset class. For both institutional and individual investors with long time horizons, agricultural land is an ideal method for diversifying beyond a portfolio of in truth stocks and bonds, whilst also providing a steady flash of good velvet income and offering estimable upside potential for chief gains due to the upping agricultural " super path " as coined by noted farmland and merchandise tycoon Jim Rogers.

In the UK for copy, over the last ten years, agricultural land has important roughly 13 per cent per year in the according to Investment Property Databank ( IPD ). The US and other Western countries have empitic companion farmland investment returns. Farmland prices have wherefore skyrocketed, drawing near as high as 17, 300 ( approximately $30, 000 ) per hectare in the northwest of England to take right one exemplar.

As a repercussion, investors are increasingly turning their interest in agricultural land investing to areas of the world where farmland prices are starting from a much lower base, thereby providing much greater upside potential. One area where this has been particularly prevalent is Africa, where hedge funds and other large institutions have been making large agricultural farmland investments. Hedge funds and private equity funds alone have purchased 148 million acres of farmland in just the last three years. Just to take one example, the UK ' s well known Guardian newspaper just outlined how major a full 5pc of African agricultural land had been purchased or leased by outside investors, and that more than 200m hectares ( 495m acres ) of land - roughly eight times the size of the UK - were sold or leased between 2000 and 2010.

Given the long history of colonial exploitation in Africa, there has been increasing resistance to what is perceived by many western Non - Governmental Organisations as well as Africans as a " foreign land grab. " Whilst some of these feelings may be based on old stereotypes rather than current conditions, there is no question that some abuses have occurred. Just to take one example, farmlandgrab. org just published an article arguing that a US firm was running roughshod over the local population in Cameroon with one of its agriculture investment.

It is undoubtedly true that frequently large institutional investors make deals directly with the central governments of African countries. Given the amount of corruption and generally poor governance that still exists in Africa, the investment capital frequently disappear into the pockets of corrupt local officials whilst local farmers are forcibly removed from their homes and lands.

By the same token, it is far from true that all foreign investments in African farmland are predatory and exploitive. Global consultancy McKinsey recently produced a report on the future of Africa which noted that the continent had over 25 per cent of the globe ' s arable land yet produced only ten per cent of agricultural output. McKinsey argued that up to $50bn / year of African agricultural farmland investment would be needed to bring the sector up to global standards and allow African agriculture to maximize its potential output.

One reason to consider outside investments in African farmland is that the amount arable land globally has been decreasing. As farmland continues to be lost to urbanization, transportation networks and real estate development, the world must try to feed more people on less farmland. Africa, however, holds approximately 60 % of the world ' s remaining uncultivated land that is suitable for farming, so looking at food security from a broader perspective, Africa has a an opportunity to feed both itself and the world in the coming decades.

Given the need for investment in African agriculture, there is no reason that foreign farmland investments on the continent cannot be structured as a win - win for both private investors and the host country populations. With the right guidelines and intentions, foreign investment in African farmland can be both ethical and profitable. The major issue is whether a set of basic principles for " win - win " farmland investment in Africa can be developed. Just as an example, we believe that the following principles can be used to evaluate the fairness of foreign farmland investment in Africa:

1. The investment was directed at completely unused land, and none of the local population has been removed from any of the land since it was not in use as a food source;

2. The farmland investment was negotiated directly with local villagers and tribal chiefs, so there was no chance for corruption at senior government levels;

3. Farmland investments in developing countries should not simply be premised on food security concerns by the foreign investors, who may want to simply ship the entire crop production back to their home countries;

4. The workforce should as much as possible be local hires who should be paid a fair wage well above the minimum for that country; and

5. Finally, foreign investors in African farmland should also have at least some kind of community re - investment programme in the host country.

Whilst these principles will not solve every concern of local African NGOs, they are at least a starting point for considering examining whether a farmland investment is structured as a win - win for both the investor and the local population, or if the investor is behaving in an inherently exploitative manner. One other interesting factor is that when farmland investment projects are structured such that retail investors can participate, we have seen that these types of individual investors demand that any project they are involved with be both ethical and profitable.