Agcapita

The Global Food Crisis and Gold’s Valuable Role

The equity and bond markets have benefited from a long period of low inflation, but ongoing and massive central bank liquidity injections point to a far less benign environment of elevated inflation ahead. Research by our firm, Agcapita Partners (Calgary, Canada, based farmland private equity firm) shows investors must be prepared to rotate into asset classes with different characteristics.

During the last commodity bull market & high inflation period in the 1970’s, equities materially underperformed farmland. Western Canadian farmland went from around $100/acre to $550/acre (550% total return and 176% in inflation adjusted terms), cash held in a money market account barely kept ahead of inflation (6% inflation adjusted return) and the S&P 500 index returned less than 2% per year (a loss of almost 50% in inflation in adjusted terms)

We believe the world is still in the early stages of this current commodity bull market. When agriculture commodities prices are compared against their previous inflation adjusted highs they are significantly discounted implying scope for further increases:
 Corn is US$ 5/bushel currently compared to US$16/bushel in 1974,
 Wheat is US$ 7/bushel currently compared to US$27/bushel in 1974
 Canadian farmland is C$ 660/acre currently compared to C$1,100/acre in 1981

Commodities Boom and Rotation

The equity and bond markets have benefited from a long period of low inflation, but ongoing and massive central bank liquidity injections point to a far less benign environment of elevated inflation ahead. Research from Agcapita Partners LP (Calgary Canada private equity firm) shows that investors must be prepared to rotate into asset classes with different characteristics.

During the last commodity bull market/high inflation period in the 1970s equities materially underperformed farmland. The S&P 500 index returned less than 2% per year nominal (negative 50% in inflation adjusted terms), funds in a money market account returned 6% in inflation adjusted terms (barely staying ahead of inflation over 10 years) while western Canadian farmland went from around $100/acre to $550/acre (550% nominal return, 176% in inflation adjusted terms).

The world is still in the early stages of the current commodity bull market. When agriculture commodities prices are compared against their previous inflation adjusted highs they are significantly discounted implying scope for further price increases:
 Corn is US$ 5/bushel currently compared to US$16/bushel in 1974,
 Wheat is US$ 7/bushel currently compared to US$27/bushel in 1974
 Canadian farmland is C$ 660/acre currently compared to C$1,100/acre in 1981

Stagflation or Deflation?

Superb article. I agree wholeheartedly that poltical stability will be a great differentiator in the returns generated by hard asset/commodity investments going forward. Many governments are taking the view that energy and agriculture are strategic industries and acting accordingly. The author is correct that farmland has already moved quite significantly in value in most politically stable regions of the world - with one exception - Canada. The average price of farmland in western Canada is still only $660/acre with the province of Saskatchewan below $400/acre. This is for good quality dryland wheat farming land, world class infrastructure, rule of law and enforeable title. Compare that to $2,400/acre in Argentina with poor infrastructure and massive poltical risk (see recent export tariffs imposed on agricutlural commodities).