Looking at Agriculture as an asset class

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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.
Compared to other selected asset classes within the U.S. markets and global commodities, farmland and timberland have upheld their reputation as high-returning, low-risk asset classes.
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 fundamentals of agriculture are some of the most promising characteristics of this asset class. With the global population expected to reach 9.7 billion people by 2050, developing a robust food system will ensure a sustainable and prosperous future. This increase in global population will require a 60 per cent increase in the demand for food production. Where will this growth in food production come from? While U.S. agricultural markets may be an investor’s first solution, they may not be the most lucrative market for agricultural investment.
Potentially productive U.S. agricultural land is being developed rapidly, and as a result of this shrinking supply, prices for remaining farmland are increasing. From 2007 to 2012, nearly 3.5 million acres of rural land in the United States were converted to non-agricultural uses. During that same period, according to the USDA’s 2016 Land Value Summary, U.S. farm real estate, cropland, and pasture land rose in price per acre by an average of 17 per cent.
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.
Opportunities and Risks in Latin American Agriculture
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.
The price is a compelling point of differentiation between U.S. and Latin American farmland. A 2016 Iowa Land Value Survey found the average price of Iowa farmland, some of the most productive and sought-after farmland in the U.S., was approximately $7,183 per acre[ii].  Compare that, for example, to the average price per acre for top quality, fertile farmland in Uruguay at $4,850 per acre or productive cropland in Argentina at $3,600 per acre and these price points become hard to ignore. As the graph below shows, the average price of varying types of agricultural land in several different Latin American countries is extremely competitive against current U.S. agricultural land prices.
[ii] Wendong Zhang, “2016 Farmland Value Survey Iowa State University”, Iowa State University Extension and Outreach, 2016, https://www.extension.iastate.edu/AGDM/wholefarm/html/c2-70.html, January 2, 2017.
by Michael DeSa, Founder/CEO, AGD Consulting

Note: Although this post is out of date ( published first in 2018 ) the comparisons remain valid. 

Contact the Gateway to South America team to learn about the best investment opportunities in the region. The company is a benchmark for foreign investors wishing to invest in Argentina, Brazil, Chile, Paraguay, Peru and Uruguay, providing expert advice on property acquisition and disposal.


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