Looking at Agriculture as an asset class

Agriculture is one of the oldest asset classes in the world, time-tested and proven to weather economic uncertainty. Within agriculture, farmland has historically proven itself as a tangible, stable storage of wealth, appreciating approximately 3.5 per cent annually over the last 30 years.

A Global Farmland Index recently developed by Savills World Research, an index based on data from 15 key farmland markets across the globe, recorded an annualized growth since 2002 of 14.8 per cent. The robust and steady growth highlighted by the index also illustrates a reduced volatility characteristic of the asset class. A direct comparison between farmland and other global commodities shows farmland values were less volatile than other commodities and were significantly less affected by the credit crunch in 2008.

A further assessment of farmland and the S&P 500, the market index representing roughly 70 per cent of all publicly traded stocks, shows that farmland investments dramatically outperformed the S&P 500 Index over 15 years. As the graph below illustrates, the 2008-2009 financial crisis had virtually no impact on the NCREIF Farmland Index’s investment value, further highlighting agriculture as a secure, stable alternative uncorrelated with the equities market.

The relative ease of agricultural transactions in the U.S. has more investors chasing the same shrinking pool of opportunities, further reducing supply and continuing to drive up prices. Investors bold enough to diversify with an overseas agricultural investment can find plenty of untapped opportunities, strong upside potential, and an industry poised to not only support but profit from the rise in global population and the corresponding demand for increased food production.

The multi-faceted investment opportunities in Latin American agriculture provide an assortment of alternatives for various investors – private, institutional, family offices, and High Net Worth Individuals (HNWIs). An ideal climate, quantifiable soil productivity, and an immature agribusiness market create opportunities that the U.S. can hardly present as a fully developed market. These conditions present a growth potential offered by Latin American agriculture that is hard to match in other parts of the world.

A critical consideration when researching agricultural land as an investment is the availability of arable land and sufficient water resources in that region to support sustained agriculture.  The Latin American region is home to the world’s greatest agricultural land and water availability per capita. Comprising only 15 per cent of the world’s land area, Latin America receives nearly 30 per cent of the world’s precipitation. It is home to almost 35 per cent of globally available renewable resources[i]. As you can see from the image below, much of Latin America has a water stress level (ratio between withdrawal and availability) between 0 and 0.3.  Essentially, there is very little competition or stress between the amount of water consumed by the population and its availability in the environment. The same cannot be said for the United States.

[i] Inda Flachsbarth, Barbara Willaarts, Hua Xie, Gauthier Pitois, Nathaniel D. Mueller, Claudia Ringler, and Alberto Garrido.  “The Role of Latin American’s Land and Water Resources for Global Food Security:  Environment Trade-Offs of Future Food Production Pathways”, PLOS One, U.S. National Library of Medicine National Institutes of Health, January 24, 2015, http://www.ncbi.nlm.nih.gov/pmc/articles/PMC4305321/, May 20, 2016.