Over the last 2 years, investors have flocked towards farmland investments or included them in a real asset allocation. In a low-returning environment, investors are attracted to farmland's income and 7%-to-10% return expectation. It doesn't hurt that agriculture is a natural inflation hedge and has a low correlation to other asset classes. Apart from this, it also possess certain unique investment characteristics that make it a most sought alternative investment asset class to enhance the risk-return profile of a portfolio.
Historically, agricultural land has repeatedly benefited from 'flight to quality' investment behavior and performs well during times of market uncertainty, thus acting as an ideal recessionary hedge. Along with gold, farmland is also one of the world's principal defensive hedges and is sought after in times of economic volatility. Although some limited pressure on values was recorded during previous recessions, the general upward trend was not stifled.
In my previous article "Protein Bomb: The Case for Long-Term Investment in Arable Farmlands", I discussed the fundamental outlook of this asset class for the long-term. Now we will focus on how it can add value to an investor's portfolio given its unique investment characteristics.
- Low volatility + High absolute returns = High Risk Adjusted Returns:
Compared to quote equity instruments, farmland prices exhibit low volatility. Historically, data show that farmland has exhibited strong capital protection characteristics over prolonged periods of time.
Sharpe Ratios for U.S. assets classes between 1991 and 2007 (geometric mean % total returns)
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Farmland's historical risk/return profile compares favorably with more traditional assets such as stocks and bonds.
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Source: IPD/Savills Research
- Low correlations to traditional asset classes:
Farmland has a low correlation to traditional retail investments - public equities, bonds and real estate. Most of these traditional retail investments are exhibiting high positive cross correlations, so it is very difficult for investors to construct diversified portfolios with the mainstream options. For investors looking for improved diversification, allocations to non-traditional and uncorrelated sectors like farmland continue to grow in appeal
10 year correlation matrix (Click to enlarge)
- Inflation Hedge:
While having a low correlation to traditional investments, farmland has a high positive correlation to inflation - this appears to hold true in most jurisdictions where historic pricing data is available. U.S. research shows a correlation of positive 0.54 between U.S. farmland and the Consumer Price Index ("CPI"). Farmland's correlation to CPI significantly exceeds that of stocks, bonds and non-farm real estate. Farmland shares this correlation attribute with gold. However, unlike gold, farmland also produces stable income streams. As a consequence, it has been described as "gold with yield".
- Linkage to emerging market growth with limited political risk:
As emerging markets develop, the consumption of energy and agriculture commodities increases rapidly at the early stages of GDP/ capita growth. By way of contrast, direct investments into farmland in developed nations provide linkage to emerging market growth but without political risk or opaque accounting. Refer to my article "Food For Thought : China's Protein Story" and "Why Latin America Can Resolve The World's Protein Imbalance"
- Reliable cash-flow generation:
By cash renting (i.e. leasing the land to farmers for 100% upfront cash payment rather than operating) an investor in farmland can look forward to reliable cash-flow (on the order of 6-7% gross pa) without operational risk.
A final word: Historically, land (and agriculture in general) has repeatedly benefited from 'flight to quality' investment behavior. It performs comparatively well during times of market uncertainty, thus acting as an ideal recessionary hedge. As the Money Management Journal dated December 2008 wrote:
People are going to need to eat no matter what happens to the economy. The farmland portfolio returned 14.97% for the year 2007 - 2008 ending September 30, at a time when virtually all other asset classes and strategies [in our portfolio] are posting negative numbers.
Now coming to the investment part, I had mentioned some ETFs to get exposure to this asset classes. Another good way would be to invest in listed companies with farmland possessions in emerging markets. Some of the global listed companies with large land holdings and featured in many of the agricultural funds include.
Cresud (NASDAQ:CRESY) is an Argentinean agricultural company that invests in land, cattle and technology. Cresud generates profits through the acquisition, transformation and sale of farmland. The main crops of the company are wheat, corn, soybean and sunflower. The company is rapidly expanding, and currently has 625,000 hectares under control in Argentina. It also owns land in Brazil (through Brasilagro), Bolivia, Paraguay and Uruguay.
Cosan (NYSE:CZZ) is one of the largest sugar and ethanol manufacturer in Brazil. It is one of the biggest private landowners in Brazil, with a portfolio of approximately 204,000 acres, as of March 31, 2011. In 2008, it formed a venture with a U.S. company to purchase farmlands in Brazil.
Olam International (OTCPK:OLMIF) operates as an integrated supply chain manager of agricultural products and food ingredients worldwide. The company owns oil palm and rubber plantations in West Africa, coffee plantations in Laos, almond orchards in Australia, dairy farming in Uruguay, farming of peanuts in Argentina, rice in Nigeria and Mozambique, and forestry concessions in tropical hardwoods in Gabon. In August 2010, Olam signed a contract with the government of Gabon to develop a special economic zone, which includes a 300,000 ha oil palm plantations and a facility to process 1 million cubic meters of timber annually. Olam International is also engaged in a massive contract rice-growing scheme in Nigeria, including 14,000 rice farmers on 15,000 ha. In addition, the company acquired the New Zealand company NZ Farming Systems Uruguay in September 2010. This company owns several dairy farms in Uruguay, on 12,500 ha of land.
SLC Agricola Brazil (OTCPK:SLCJF) cultivates soy, cotton, coffee, corn seed, and wheat. In 2008, SLC Agricola owned a land bank of 117,000 ha. In 2008, the company was able to expand its holdings to over 200,000 ha due to a loan provided by IFC. Currently the company owns 223,000 ha, and it plans to expand to 250,000 ha by 2011.
Union Agriculture Group (UAGR) owns 41,860 ha of land in Uruguay. The properties are used for cattle, sheep, dairy and grains.
Wilmar International (OTCPK:WLMIY) is a Singaporean oil palm company with large amounts of land mainly in Indonesia and Malaysia. Wilmar has an interest in Oil Palm Uganda Limited, which holds a 10,000 ha concession in Uganda. The government has agreed to source 30,000 additional ha on the mainland, including 20,000 ha of nucleus estate.
Brasilagro (OTC:BRCPF) is owned by the Argentinean Cresud, that produces sugarcane and grain products comprising soybean, sorghum, and corn. The company currently has a land area of 174,840 ha and revealed its aim to accelerate the growth in its planting to 40%, taking 2010-11 sowings to 65,000 ha.
Bunge (NYSE:BG) is one of the largest agriculture companies. It announced plans to acquire more than 10,000 ha in Brazil from the local firm Açúcar Guarani to grow sugarcane and has established a joint-venture with Japanese trading house ITOCHU Corporation to produce sugar and ethanol in Tocantins, northern Brazil. In August 2010, it announced plans to purchase oil palm plantations in Indonesia and Malaysia.
Magindustries (OTCPK:MAAFF) has rights to manage a 68,000 ha eucalyptus forestry plantation, supported by a 500,000 tonne per year wood chip plant located in the Republic of Congo. In addition, the company owns rights in the Kouilou Potash project located in Congo.
Agroton (OTC:ARPUY) is a large agricultural producer in Eastern Ukraine. Between 2001 and 2009, Agroton tripled its harvested area from 41,000 ha to 140,000 ha.
Australian Agricultural Co (OTCPK:ASAGF) is the largest beef cattle company in Australia, which owns 7.7 million hectares, comprising 1.2 per cent of Australia's land area. The company derives its returns from its two main asset holdings, cattle and land.
China Forestry Holdings (CHFY.PK) plan is to seek rapid and sustainable growth through the acquisition and expansion of forest reserves. In March 2010, China Forestry Holdings acquired new forests covering 53,333 ha, bringing the total amount of forests to over 210,000 ha.
Khon Kaen Sugar Industry (KSL) engages in the manufacture and distribution of sugar and molasses in Thailand. In 2007, the company, together with Cambodian and Taiwanese partners, acquired a 90-year 20,000 ha concession in Cambodia (the company owns 50%) and a 30-year 10,000 ha concession in Laos (the company owns 50%).
KTG Agrar (KTG) manages more than 30,000 hectares in Germany and Lithuania and plans to expand to 40,000 hectares. Most of KTG Agrar's land is leased, but the company wants to increase the amount of land it owns in order to benefit from the growing value of farmland.
MCB Agricole (4GW1) has presence in 12 regions of Ukraine and currently owns a land bank area of 100,000 ha. In 2008, the company announced that it aimed to expand its land bank area to 400,000 ha.
Razgulay Group (RU) is a Russian agricultural producer mainly of grain, sugar and rice. In 2008 the company had a land area of 232,000 ha and in 2009 the area increased to 319,000ha. The company plans to own 332,000 ha in 2010.
São Martinho One is one of the largest producers of sugar and ethanol in Brazil, with a planted area of 114,000 ha.
Sintal Agriculture (SNPS) cultivates a range of crops, including wheat, barley, maize, sunflower, soy, rapeseed and corn. The company owns about 100,000 ha of agricultural land in Kharkiv and Kherson regions, Ukraine. y 2012/2013, the company aims to have a land area of 150,000 ha.
Source: Profundo for FIAN Deutscheland
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.