Farm land is where the money is says the investment experts
Farm land is where the money is says the investment experts
There’s money to be made in buying global agricultural land The global population is rising steadily — but food production is not, says Chloe Barrow. The result? More demand for arable land, as nations invest to safeguard their food supply and their wealth China, we learn, has 20 per cent of the world’s population and only 9 per cent of its farmland. By contrast Ukraine — at least before Russia took a chunk of its most fertile ground away — had hectares to spare. That would explain why in September 2013, China bought an area in Ukraine the size of Belgium (keep up): 3 million hectares. According to Channel 4 News, before 2009 China had only 2 million hectares of foreign agricultural land in total; today it is reputed to be over 11 million. And it’s going to grow. Ding Xuedong, chairman of China Investment Corp, recently revealed that China plans to invest yet more in agriculture around the world, says the Financial Times.
‘China is urbanising at such a rate that they’re destroying a lot of their farmland or polluting it, or building massive hydroelectric plants that flood the land, taking it out of food production,’ says Andrew Shirley, head of rural property research at Knight Frank. Staples of the Chinese diet such as noodles, rice and meat are going to have to come from somewhere.
A strain on food supplies is not limited to the likes of China, Saudi Arabia or India, however. Global agricultural production has stagnated in recent years, according to Bertie Hoskyns-Abrahall, a partner at law firm Withers who specialises in advising landowners and estates.
‘In the past decade we’ve seen stronger demand, and the traditional suppliers of the world — the US, Canada, Europe, Australia — have been unable to respond to that,’ he says. In fact, the world’s population is projected to increase from seven billion to nine billion by 2050, and that includes a doubling (from one billion) of the population of Africa — the only continent that is not self-sufficient in food production, per foodsecurity.ac.uk. However, the world’s agricultural production grew at an average annual rate of 2.4 per cent between 2001 and 2010.
This slowdown in agricultural productivity growth, said the International Food Policy Research Institute in its 2012 global food policy report, could signal rising food scarcity, higher commodity prices and increased competition for the world’s land, water, and energy resources. Added to the issue of a rising global population is the fact that a significant percentage of the world’s diets are changing as people get wealthier. ‘The emerging markets are eating more and more high-protein foods and shifting away from grains to a more meat-based diet,’ says Chris Gadd, a grains analyst at Macquarie Group.
This shift in dietary requirements is increasing food demand down the chain — Gadd explains that while 1kg of grain translates into 1kg of bread or rice, 1kg of poultry needs to be fed about 2kg of grain, hogs require 4kg of grain and beef is up to around 8kg. ‘When you start to eat meats you get a far lower conversion rate, so there’s a huge shift in production requirements on a per capita basis,’ he says. Spotting this shift in dietary patterns, agricultural companies are turning to the meat trade.
For instance, rural asset manager SLM Partners launched its Australia Livestock Fund in 2012, having acquired grazing land in Australia for sustainable beef cattle production. ‘There is huge demand for Australian beef from Asia,’ says Paul McMahon, managing partner at SLM. Like the Chinese government, private investors regard land acquisition as a long-term investment, not only from a capital appreciation point of view, but also because they too are interested in food security for the future.
‘They realise that there will come a point when global stocks of food will dwindle,’ says Hoskyns-Abrahall, ‘and if you haven’t got control of the land then you haven’t got a say in what happens.’ Since there is substantial demand for land, it is consequently a high-yielding, albeit long-term and illiquid, investment. ‘Land really has been one of the finest investments of the last 100 years and has certainly outstripped the FTSE 100. Ten years ago it was £2,500 an acre and in some places it’s now £14,000 — that’s quite an increase in real values,’ says Hoskyns-Abrahall, adding that the UK also has a clear and well defined land registry system and is a safe bet in terms of political stability.
Land derives much of its value from the fact that it is in limited supply, particularly in Britain. But while scarcity gives land its value, it also limits food production, so shouldn’t investors concerned about food security be looking towards pastures new? ‘If you want to meet food demand you have to look to parts of the world where arable area is available, such as Brazil and the former Soviet Union,’ says Chris Gadd. But while there may be a higher supply of land available abroad, acquiring international acres, particularly in developing countries, is not always a straightforward transaction. ‘You might see a story that says China has bought 200,000 acres in Sudan, but there’s no land tenure in Sudan — they have a government-to-government deal that allows them to control the land. It’s the same in Ukraine — you can only buy the right to lease the land,’ says Knight Frank’s Andrew Shirley, adding that Brazil recently reinforced laws to reduce international land ownership following a spate of land-grabbing by foreign investors.
Those who do manage to get their hands on some land must assume the risk that should the incumbent government be overturned — a distinct possibility in politically volatile developing countries — the deal could well be off. Added to ownership complications, international land investment is also subject to the risks of extreme weather conditions.
‘The UK has a moderate climate which is not usually affected by extreme weather. But places like Australia, Eastern Europe, North America, which was recently under a foot of ice, and Central America, which just experienced its worst ever drought, are affected by extreme weather,’ says Tom Raynham, head of agricultural investments at Knight Frank. Extreme weather and political instability aside, there is no point in investing in farming land abroad if an efficient infrastructure is not in place, as is the case in countries such as Brazil, since this greatly affects cost efficiency.
‘In America they’ve developed a very efficient infrastructure so that transporting grain 2,000km from the core of the Midwest to the major ports costs just $30-40 per ton,’ says Gadd. ‘Mato Grosso in Brazil is a similar distance from the southern ports, but due to a very inefficient network where the farmers rely more on road transportation than barge, the cost is as much as $150 a ton. The global price for corn today is $200 a ton, so that cuts down a huge portion of revenue.’ Putting money into Brazil’s infrastructure rather than its land would be a better long-term investment, according to Gadd.
‘In terms of agricultural production, I think the easy one is certainly the infrastructure in Brazil, rather than the farmland where to a certain extent you’re having to pay for these infrastructural impediments,’ he says. He adds that there are a number of projects under way to upgrade Brazil’s deficient railways, roads and ports, but progress is slow. However, Bruno Savaris, an infrastructure analyst at Credit Suisse, told The Economist last September that there were unlikely to be many takers for either rail or port projects in Brazil due to regulatory and execution risks, adding that a third of the planned investments will be auctioned in the next three years, including airports, a few simple port projects and the best toll roads.
Of course, one shouldn’t forget that the interest of foreign governments in agricultural land-grabbing is not wholly for their citizens’ benefit, says Andrew Shirley. ‘The Chinese government knows the one thing that’s likely to cause unrest is when people get hungry. Grain prices going up in North Africa was one of the factors that kicked off the Arab Spring — then the hunger turned into a political issue and governments started getting kicked out.’ That might not be an investment game you want to get involved in.
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