Farmland globally is an asset with an approximate total value approaching $9 trillion. In the United States farmland has shown strong and sustained returns, averaging 10.5% annually over the period from 1970 to 2015.
Farmland, as an asset class, has a number of extremely valuable characteristics. Some of them are:
- It is Inflation-resistant;
- It is contra-cyclical to many conventional equity investments;
- It is a real asset which realistically cannot drop to zero value;
- Its price is driven upwards by strong demographic trends of increasing global population and per-capita caloric consumption.
Barriers limiting investor access to farmland
Despite this attractive constellation of characteristics, farmland has not enjoyed a great deal of institutional attention over the past half-century or more.
Institutional investors interested in getting into the farmland sector have been stymied by a perceived lack of opportunity, coupled with a perception of managerial difficulty in handling farmland as an asset.
Shortage of Human Capital: There have at times been upwards of $2 billion in “dry powder” financing available to agricultural fund managers, according to the San Francisco-based consulting firm Callan Associates. Nevertheless, managers have been unable to find appropriate properties to acquire. In large part, this is because of a shortage of human, rather than fiscal, capital. Farmvest, another California-based consulting group, estimates that there are only about 40 investment managers working in the agriculture space. With so few boots on the ground, finding and purchasing appropriate farmland can be very difficult.
Lack of Knowledge about a New Asset Class: Farmland is a much less mature asset class than real estate, in terms of professional asset management resources available to investing groups. The boards of institutional investors, such as pension funds, are generally lacking familiarity with agriculture as an asset class, meaning that every new investment decision requires a rather laborious process of educating the board before asking them to take action.
Opaque Farmland Valuations: Institutional investors have been discouraged from farmland investing because farmland valuation can be a completely opaque question, particularly to fund managers with no experience in the sector. The vast majority of properties are held by private owners and ownership changes can occur at intervals of decades or even lifespans rather than annually or quarterly.
Recent Growth in Popularity
Agriculture is attracting higher levels of interest from institutional investors in recent years, driven by the growing global demand for food and the need for portfolio diversification and stronger returns.
Since 2006, more than 100 unlisted agricultural and farmland-focused investment funds have closed, raising about $22 billion in total, and since 2015 fundraising has ranged close to $4 billion annually, according to the data analysis company Preqin.
A number of factors are contributing to this trend among institutional investors.
Population Growth and Changing Consumption Patterns: According to the Food and Agricultural Organization of the United Nations (FAO UN), Earth’s population is expected to increase to 9 billion people by 2050 from 7.6 billion in 2018. Population growth is coupled with the demand for increased quality and quantity of diet among the emerging middle class. Humans are projected to consume more calories; 3,070 daily per capita in 2050 as compared to the current consumption of 2,772 daily per capita. Meanwhile, arable land on which to produce this food is only expected to increase to 1.661 million hectares from 1.592 million hectares. This represents a 56% increase in total caloric intake with only 4% more arable land available.
Need for Stable Assets: Interest rates have been at record lows for much of the past decade. This is historically not a stable condition, and in the United States, the last three years have seen the rumblings of an increasing interest rate as the Federal Funds Rate has ramped up from a historic low of essentially 0% in 2008 to 2.4% as of Feb 2018. This creates a strong incentive for fund managers to move assets out of fixed-income investments, which are vulnerable to interest rate hikes, and into stable assets that perform well in an environment of rising rates. Timber and agricultural assets, which produce strong perennial income streams uncorrelated to interest rates, are a strong candidate for such asset reclassifications.
Desire for Diversification: Agricultural assets provide the diversification that institutional investors are perpetually seeking out. Farmland historically has not correlated with other asset classes such as equities and securities. It performs based on both the underlying value of the land itself and the valuation of the crops grown on it.
Unlike the stock markets rapid fluctuations, agricultural land values change far more slowly and within a narrower band of value. Even during the height of the Great Depression, farmland did not become worthless; people always have to eat.
Farmland prices correlate most closely with the global population, a metric with a historically upward trend that does not show signs of ceasing. This fundamental stability is attractive to portfolio managers looking for a safe harbor for returns from more volatile asset classes.
The growing attractiveness of the farmland asset class is driving a slow but potentially tectonic shift in institutional investment patterns. Investors with long-term objectives and the willingness to invest in the necessary human capital component of farmland management will be taking a larger and larger stake in this critical global market. It will not happen overnight, but in the next two decades smart and well-managed institutional investors will move from the sidelines of the farmland sector and become more important players.