Four Ways To Play The Global Race To Farmland
As The Economist reported recently, the world will need to produce more food over the next 40 years than it has in the previous 10,000 combined. Meantime, sprawling cities are using up arable land, and the production of biofuels is demanding an ever-increasing share of the earth’s surface.
Rising incomes in developing countries are causing the people in those countries to demand more substantial and varied diets. They want more meat, which in turn means more grain to raise more livestock. Per-capita calorie consumption has increased 23% in the last 50 years, due in part to higher incomes in developing countries.
For all these reasons, according to the UN’s Food and Agriculture Organization, global food production will need to increase by at least 70% by 2050. With the amount of available land shrinking, the pressure on the value of agricultural land and products is obvious.
I won’t belabor the supply-demand point, because you’ve heard it before. Suffice it to say that agro-investing passes that test.
I’d like instead to focus on the opportunities that this undersupply-growing demand situation is creating for the buyer or investor.
As I do when considering residential property opportunities, let’s begin by analyzing potential motives for agro-investing. The first step to finding the investment opportunity that’s best for you is to understand your investment objectives.
Agricultural investors fall into four categories:
#1—Survival: This type of buyer is interested in creating a self-sustaining environment for his family’s personal use. The objective here is not to reap investment gains but to have a self-sustaining home to fall back on if necessary and to enjoy prepping it and working it in the meantime. This agenda makes sense for people who enjoy the outdoors and who appreciate the preparedness angle.
#2—Land Banking: Buyers in this camp are counting on the value of arable land going up as supply shrinks and demand continues to rise. The idea is not to have the land produce anything but to hold the land until you want to realize a long-term capital gain.
#3—Hands-On Agricultural Production: This buyer wants to own the land and use it to produce an income. A friend recently bought a coffee farm in Colombia and now sells the coffee into the marketplace. And a reader recently wrote to say that she and her family were now running their own productive cattle farm in Brazil. This investment works well if you want to make a living on your property.
A surprising number of people make this kind of investment… but the ones who make money at it are usually those with prior farming experience. If you’re going to retire from your job as an accountant to raise blueberries in Uruguay, you’re likely going to end up with an expensive hobby rather than a serious income.
A variation on this theme is the investor who leases his farmland out to an experienced farmer. Pursuing this strategy, you’d typically get a share of the proceeds, and of course you’d benefit from the value of the land increasing. This scheme might net you about half what you’d earn if you worked the land yourself. In Uruguay, for example, leased-out land nets about 3.5% to 4% annually.
#4—Hands-Off Agricultural Production: This type of investment can take many forms, from an agro-oriented mutual fund or an exchange traded fund to an investment in the production of an agricultural product managed completely by someone else.
Of these four categories, land banking and the hands-off production investment work best for me. I know better than to think I’ve got the skills for running an active farm. Plus, with multiple residencies and banking presences around the world, I’ve already put in place enough survival alternatives to suit my outlook.
My favorite market for land banking is Uruguay, because of its plentiful water supply, abundance of different types of agricultural land, and mature infrastructure for getting things to market. Uruguay also offers a solid financial system and is friendly to foreign investors.
However, a totally hands-off agricultural production investment has the advantage of allowing a smaller investment than buying your own farm. I’ve seen a number of good deals of this type over the past few years to do with the production of coffee, teak, and mangos.
Here are some of the attributes that good hands-off agro-offers have in common:
- These projects are normally turn-key. You buy into a project that’s managed professionally. Your job is to take the profits. More and more turn-key investments are being put together specifically for individual investors, as developers realize the collective power of the retail investor.
- Strong management is critical. For maximum yields, you want to invest with industry experts in the field, people with firsthand experience managing the type of crop you’re investing in.
- These investments offer economies of scale, due to their size, reducing expenses (materials, machinery, and labor) and leaving more available for payout to investors.
- When you’re part of a large project, market access is better than you could ever get on your own. If you want top dollar for the product, you need to be one of the big boys that the major retailers and processors want to buy from.
- A good project offers a premium product expected to weather market downturns better than mass-market production fare.
- Finally, with the best projects, the land is titled to the buyer. If you invest in teak, for example, you’re actually buying the land that the trees are grown on and then sharing in the production profits. If for some reason the teak profits don’t turn out as you’d hoped, you still own the land… not a piece of paper.
Teak pays high returns when left until optimum maturity, and it offers the further advantage that you can time the market when deciding when to cut the trees. If teak prices are down this year, you have the option to wait for potentially better prices next year. The drawback with teak is that it takes so long to grow to optimum maturity… maybe 25 years.
Coffee and mangos, on the other hand, begin producing relatively quickly and continue producing for a long time. Mango trees have a productive life of 60 to 80 years, providing cash flow for generations.
In the end, picking an agro-investment is no different than picking a residential property investment. You analyze what your motives are, take stock of the different categories of properties that are out there, and then focus in on the available deals.
One final point: I’d say that agro-investments are more stable than residential property investments. The agricultural production shortage is a worldwide problem, and agricultural products move freely across borders, resulting in a worldwide supply-demand equation. Accordingly, agro-investments are less susceptible to local market ups and downs.
Lee Harrison
