Many investment professionals, including the legendary Jim Rogers, believe agriculture commodities are only in the early-to-middle innings of a major "super cycle" of increasing prices. Yes, agriculture stocks have had their ups and downs and have not had a great year to date, but as this Barrons piece points out, the long-term theme is still compelling.
The argument for this is fairly simple. The number of people in the world is increasing, and projected to reach nearly 9.1 billion by 2050 according to the United Nations. Emerging markets nations like China and India are growing richer, and their citizens want to move up the food protein chain. Meanwhile, the amount of arable farmland has been decreasing.
In addition, as with many major trends in the world today, a large reason behind the rapid run-up in food prices is China's development. The huge increase in pollution and development has unfortunately had quite a negative effect on China’s farmland sector. In only 12 years, over 8 million hectares of farmland has been lost to development in China, and this article helps explain why. As China has massive foreign currency reserves, it is perhaps not surprising that they are looking to secure food supplies from abroad.
The question is what are the best ways for making money from the agricultural sector? One way is to invest directly into agriculture stocks such as farm equipment maker John Deere (NYSE:DE), global seed giant Monsanto (NYSE:MON) or fertilizer company Potash Corp of Saskatchewan (NYSE:POT).
Another method is to invest in agricultural futures through Exchange Traded Funds (ETFs) such as AIGA on the London Stock Exchange or DBC in the U.S. which tracks an entire basket of agricultural commodities including corn, soybeans, wheat, cotton, sugar, coffee, cattle and pigs. These commodities ETFs try to track the spot price of the various commodities they include. The advantage of these stocks or ETFs is that they are easily tradeable by anyone who has an online brokerage account. The disadvantage, however, is that they are still financial instruments, and as such can fluctuate widely in price.
One option most individual investors tend to overlook is direct investment in farmland. In many ways, a farmland investment is more secure, stable and tangible then putting money into stocks. Farmland allows investors to still benefit from the global trends in agriculture, while providing much greater stability than agriculture stocks or commodities which can indeed fluctuate widely as this year has demonstrated.
Just to take one of the best examples of the efficacy of farmland investing, in the last 20 years farmland in the United States has never had a down year according to the National Council of Real Estate Investment Fiduciaries (NCREIF) in the U.S. demonstrates. Not surprisingly, many large institutional investors have been investing heavily in farmland the last several years. For example TIAA-CREF, one of the largest pension funds in the world, has recently made a large move into farmland investing.
Prices for farmland in the West - particularly in Europe - have already moved up considerably, reaching as high £17,300 per hectare in the northwest of England to take just one example. While there are considerable advantages in terms of political stability to farmland investment in Europe or the U.S., the real opportunities for spectacular gains lie in emerging markets such as Africa, which holds 60% of the world's remaining arable land suitable for farming.
While farmland investment has been dominated by larger institutions historically, in just the last two years a number of options have been developed for individuals. The most common is to pool a number of individual investors' capital together to purchase a large parcel of land, and then divide it into individual parcels as small as one acre available to purchase. These farmland investments for individuals generally pay a regular yearly dividend from the sale of crops such as rice or wheat, and also provide the opportunity for long-term capital gains if the farmland increases in value. Retail investors are generally able to see their individual parcels, or else the project originator may actually sell its entire farmland investment, thereby allowing the individual small investors the opportunity to share in the upside capital gains.
There are now farmland investment options for retail investors with investment minimums starting as low as £1,950 per acre (approximately $3,100) for quality farmland in Africa, making it easily accessible by individuals and a great way to diversify. There are also direct farmland investments for retail investors in Europe, Australia and elsewhere. All of these target yearly income payments of between 9-15%, while also allowing investors to share in the upside of any capital gains as well.
There are, of course, risks with any investment, but by doing one's due-diligence and investing in the right structure with the right people and institution, farmland investment can be both safe and profitable for individual investors as well as large institutions.
Additional disclosure: GreenWorld BVI is a boutique alternative investments firm and we represent a number of farmland investment projects mentioned in this article.