On a cold winter’s day the thought of an investment manager or a banker spending a day experiencing life on a farm is a heart warming prospect. It’s unlikely to happen, but according to a recent article in the Economist it’s what is needed if agriculture is to fulfil its real potential as a vehicle for investment funds.
There’s a lot of talk globally about the positives in agriculture. Top of the list is the claim that the world will have to produce more food in the next 40 years than in the history of agriculture to now. Then there’s the fact that in developed countries farm land, as an investment, is out-performing all other assets. Behind all of this is the old Mark Twain adage, urging people to buy land, because in his words “they’re not making any more” of it. This means that despite short-term volatility, not least in the dairy sector, the long-term prospects for agriculture are green lights all the way.
The Economist article confirms that farm land, particularly in the UK and US, has out-performed any other asset. Something like gold, or shares, might be a more exciting ride when it’s possible to get in and out at the right time, but farm land is less volatile and has delivered annual returns of up to 12% since the start of the recession. This is where the claim that more financial gurus need to get onto farms comes from. It seems the proportion of global investment funds going into agriculture is low, despite the impressive growth and stability forecasts. Globally, 36 agriculture funds, with $15bn under management, pale compared with the 144 funds focused on infrastructure with $89bn, and the 473 targeting real estate with $163bn.
This is despite the recession having left investors liking assets they can see and touch, rather than trading in derivatives or other things none of the rest of us really understand. But it seems a lack of knowledge of farming is holding this back – hence the suggestion that ways need to be found to get fund managers onto farms.
Recently the sovereign investment fund for Qatar bought 50 dairy farms in Australia to combine them into a single investment; a private equity farm bought a big dairy and wine farm in California, then converted it into a farm growing almonds for export to China – a shrewd move since the price of nuts has boomed. Investors see farms as vehicles where they can invest in mechanisation and other techniques to boost efficiency and improve returns. That’s a lot easier for them than for a normal farming business.
As to investment prospects, the safest are in well established locations like the UK, with an assurance of CAP income. Slightly riskier are the southern hemisphere, US or Canada, followed by South America. Then come high risk investments in fertile African countries well placed to gain from the global upturn in demand for food. These funds are not only interested in land, but in up- and downstream investments in the entire agriculture and food sector, particularly in developing countries where there’s huge potential for growth.
These are interesting trends, and while there’s not a lot farmers can do to attract these funds, it’s comforting at a bleak time when milk and some other prices are poor, to know there are major investors out there who recognise the long-term financial potential of agriculture.