Agriculture Investing - The Basic Picture for Investors

An expanding population, scarcity of resources and a changing climate happen to be three trends that define current times. Alone, each part constitutes a uppermost issue, but when combined and intertwined as they are, they become all the more set. As time passes, the paths of these factors will become all the more linked and their effect upon the global economy will become ever more pronounced. Sectors at the nexus of this coming together submission investors the best prospects for capital growth and income in the short, mid and long - term.

The agricultural sector is wholly positioned to returns advantage of these fundamental changes in demand for food and our apparent inability to deliver it. Demand for agricultural wares is ballooning, and will run on to do so as demand for food from an extra 75 million people per annum, a shift to high protein handout in developing nations, and the use of food crops as an energy source by way of biofuels drive fresh demand. Ultimately at the alike time increasing our capacity to supply these products is diminishing, a reality that can be blamed on a multitude of factors including climate change, a definite lack of further farmland and diminishing yield increases from the green revolution.

Production of grains, as measured on a per capita basis, started to decline around the mid 1980 ' s and the availability of agricultural land per person started to fall in the very early 1960 ' s.

Two years ago In 2008, grain stocks were at their lowest even for over four decades and resulted in the biggest spike in agricultural business prices since records began.

Of course we saw these price correct themselves towards the end of the year, Someday since and so price have lengthened their rising trend despite the recent financial crisis reigning in demand. The global food supply sits in a precarious position, pressured from above and below by both increases in real demand and limits to increasing supply.

It could therefore be argued that the land that is capable of producing such commodities will become a more valuable resource as time passes. It is then safe to say that Investors savvy enough to look at agriculture investing by way of investing in farmland will be best positioned to take advantage of this supply and demand mis - match.

Here are the facts:

The global population expands by over 200, 000 people daily.

The current population sits around 6. 7 billion people and there are approximately 1, 402 million hectares of farmland, 138 million hectares of perennial agricultural land and 3, 433 million hectares of meadows or what could be termed pasture to feed this amount of people.

The grand total of food - producing land on the planet amounts to about 4, 973 million hectares. this means that each person on the planet has about 0. 74 hectares when you include all types of agricultural land. Bear in mind that this land must also continue to produce all of our cotton and rubber, as well as every ounce of grain and meat, and grain to feed the meat, and the biofuels that we all require.

These calculations lead us to conclude that, based on current levels of agricultural productivity, we require an extra 148, 460 hectares of land every single day to feed the 200, 000 or so new mouths to feed. This equates to a total area of land, solely to grow crops, that is approximately the size of Greater London, or 100 % larger than New York City, Tokyo and Singapore combined.

The real picture is alarmingly different, where we should be adding a huge amount of land to agricultural production on a daily basis, we are in fact reducing the amount of land available for agricultural purposes and for the last three years the total area of farmland has diminished substantially.

These numbers demonstrate dramatically the challenges posed to feeding an ever - expanding population with a strained farming base. This has led to sharp increases in farmland prices across the world and the value of good quality agricultural land is driven by rising demand and diminishing. To be more specific, continued rising demand for the commodities produced by farmland, i. e. food, will continue to drive values higher, whilst at the same time, restrictions on expanding the amount of farmland place a downward pressure on supply, again pushing up values.

It is a complex picture with many factors to measure and take into account. As commodity prices rise, demand for land increases, and supply also rises if more land is brought to production. At the same time, if yields increase then less land is required, but if production capacity is lost, as we are more often witnessing due to climate change, urbanisation and land degradation it is more likely that more land, which is not available will be needed, therefore existing farmland becomes more valuable and prices rise.

Farmland investment should be viewed at worst as a mid - term strategy and ideally as a long - term hold, but understanding the short - term fundamental drivers such as commodity prices allows the savvy investor to identify the best opportunities to purchase. The objective of the Investor should be to clearly understand the longer term trends, thus empowering the investor to make the correct decisions.

It is my opinion that investing in farmland will provide the investor with by far the best opportunity for mid to long - term capital appreciation and sustainable income. Choosing the right market in which to invest should be a decision taken based on the current pricing of the asset compared to its true value.

A lack of credit and depressed market sentiment are also playing a role in presenting off - market opportunities for investors to acquire assets at good prices, and a very simple analysis of the revenues generated from a farm, minus production costs, will tell the Investors if that land is good value. If one were to buy farmland in the UK at today ' s average price of around 14, 000 per hectare, we know that we could grow 7. 5 tonnes of wheat and sell it for around 160 per tonne creating a revenue of 1, 200, minus production costs of about 300, leaves a net annual income of 900 for a 14, 000 investment, equating to an annual return of 6. 4 %. Buy farmland in south America for $4, 000 per hectare and your ROI shoots to around 16 %, and in Australia you can buy land so cheaply right now that you could return an income equivalent to 40 % annually.

Many opportunities exist for private investors to take advantages of these trends without taking on the complex operational responsibilities associated with farmland ownership. For more information on farmland investment opportunities available for private investors, contact David Garner at DGC Asset Management.

Agriculture Investments - A Warning to Investors

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.

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 Investment - How to Approach Agricultural Investment For the Private Investors

Investment in agriculture is now on the radar of both institutional and private investors, with many seeing the asset class as an ideal inflation hedge and a stable source of income in these uncertain economic conditions, here we will push some to explaining how the current market is lending itself to this type of strategy, and the various forms of agriculture investment, and corner out some of the best options available for investors.

The current climate can be defined by three key characteristics; privation of visibility, low interest scale, and the very real threat of inflation caused by quantitative easing and austerity measures. Essentially investors are basket case about stocks and shares being equal limited economic visibility it is impossible to value companies and predict growth or depreciation in the value of shares, also we have gone astray the risk free income that we would normally amass from cash deposits considering interest rates are so low, and inflation will eat into our cash, effectively reducing our wealth.

So how does agricultural investment solve our problem? Let ' s take this opportunity to look at the simplest and most transparent form of investing in agriculture; farmland investment. Firstly farmland shares a positive correlation with inflation; having proven to grow in value quicker than the rate of inflation rises, therefore this type of farmland investment allows investors to grow their capital even in an inflationary environment. Also this mode of agricultural investment enables investors to capture income by renting their farmland to a commercial farmer who will work the land, this effectively replace the lost risk free income that cash would normally provide. Thirdly, investing in good quality farmland has an infallible track record of being low - risk, with a lack of supply and increasing demand for food pushing up values consistently. It is easy for a person of logic to see that demand for food will continue to rise in line with population growth, and there are fundamental limits to bringing any more farmland into production.

So agriculture investment in this form certainly fits the bill when weighed against the current economic climate, and provides investors with all of the ticks for their boxes. So how does one approach agricultural investment in the form of investing in farmland? The answer to this question is long and complex and many factors must be taken into consideration to ensure your agricultural investment turns out to be a profitable one.

Firstly one must consider location, UK, Europe, The America or Australia all present opportunities, but my advice will always be to invest locally, or at least within a structure that allows any future dispute to be handled locally.

Secondly consider the business model, do you want to buy the land and rent it out, or do you want to share in crop yields? I would always prefer to shoulder the commercial farming risk with the tenant farmer and simply enjoy a stable rental income as any default is easily handled by evicting the farmer.

So agricultural investment, does provide income, growth and capital preservation, especially it times such as these, but anyone considering an agriculture investment should at least take on the services of an expert consultancy who will have the investors need at security as their priority. Whenever considering a farmland investment for my clients, it is paramount to properly qualify the requirements of each investor, only then is it possible to recommend a suitable type of agricultural investment.