Sowing Seeds for Multi-Bagger Returns in the Long-Term

Includes: ALCO
by: Disruptive Investor

Dr. Marc Faber had the following to say about investing in agriculture – “Investing in agriculture today will be like investing in oil in 2001.” Jim Rogers, another legendary investor also considers the agriculture sector to be one of the best investment themes going forward.

Of course, it is not for their recommendation that I am talking about investing in farmland in this article. The current economic environment, the demand supply scenario for crops and the shift towards real hard assets makes me believe that the agriculture sector and farmland would be one of the most exciting investment themes in the next decade and beyond.

This article talks about the challenges pertaining to the agriculture sector and the possible investment avenue for investors (in order to profit from this golden investment theme).

Returns from Farmland in the Past

As evident from the chart below, farmland in United States has yielded annualized returns of close to 12% from the period 1971 to 2009. Discussed below are the factors, which ensure that farmland prices would continued to move upwards from current levels.

(Click to enlarge)

The Supply- Demand Scenario and Challenges

The current global food inventory is at its lowest in decades. Chin used to carry a year’s corn crop in reserves, but it’s down to 20% of last year’s crop. Similarly India used to carry almost a year’s reserve of wheat, but it’s down to only 35%.

Due to the adverse effects of global warming, change in weather conditions and droughts might become a relatively regular feature. With low food inventory, food prices will skyrocket in any such scenario.

According to the United Nations, the world population is expected to increase from 6.6 billion to 9 billion people by the year 2050. This will require significant increase in food production globally.

(Click to enlarge)

China is a major importer of food grains as the country has around 20% of the world’s population, but only 7% of the global arable land. As standards of living improve (along with increase in population), China’s food demand is expected to rise further.

Specific to farmland, many countries have started acquiring foreign farmland in order to ensure food security for their citizens in the future. Countries acquiring farmland include China, South Korea and United Arab Emirates.

To top these concerns, as urbanization and industrialization increase, there is a gradual shift away from farming to other industries. Further, valuable farmland is being sold to industrialist to set up manufacturing plants. The American Farmland Trust estimates that farmland has been disappearing at the rate of 2 acres per minute.

The increasing use of ethanol can also pose a challenge to the supply scenario for food crops. Ethanol is primarily being prepared from crops such as corn, wheat and sugarcane. Increased diversion towards ethanol production for use as fuel can trigger upside in prices for crops as well as farmland.

(Click to enlarge)

Can Farmland Be an Inflation Hedge?

It was famously suggested by an investor – “Buy land, they are not making it anymore.”

In my opinion, farmland can be an effective hedge against inflation. Here, by inflation, I mean the inflation caused by increased supply of paper money. It is very clear that interest rates are bound to be artificially low for a prolonged period. It is also clear that the policymakers are prepared to put in extra liquidity in the system whenever economic growth weakens.

In such a scenario of rapidly expanding money infusion in the system, farmland (a hard asset) can be very effective hedge against inflation.

In very simple sense, the supply of farmland can’t be increases, while the supply of paper money can be increased at any pace. Therefore, paper money deprecation itself would be a factor of upside in land prices.

(Click to enlarge)

Attractive Investment Opportunities in farmland –

The first option is to own farmland in areas with good groundwater level. However, this option might not be feasible for all investors. Therefore, some stocks, which have exposure to farmland, are listed below.

1) Alico Inc. (NASDAQ:ALCO) – ALCO is a land management company operating in Central and South West Florida. ALCO has 139, 607 acres of land and during the fiscal year ended September 30, 2010, ALCO had 9,764 acres under citrus production, 3,463 acres under sugarcane production and 78, 610 acres leased out for farming, grazing and recreational leases. For investors bullish on farmland price appreciation, ALCO provides an attractive investment opportunity.

2) Asian Citrus Holdings Limited (LON-ACHL) - is engaged in planting, cultivation and selling of agricultural products. During the fiscal year ended June 30, 2010 (fiscal 2010), approximately 1.1 million trees were producing oranges in the Hepu Plantation. With robust growth prospects in China for long-term, ACHL is expected to show strong revenue growth in the foreseeable future.

In conclusion, farmland has significant upside price appreciation potential and investors can expect multi-bagger returns from investing in this hard asset. This is especially true in times of global food shortages and economic and financial uncertainty.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.