Harvesting capital in U.S. farmland
In the perpetual search for new sources of income, investors can now consider one of the world’s oldest industries: agriculture. Although land ownership has existed for more than 10,000 years, it has only recently emerged as an investable asset class with an increasing amount of institutional investor interest similar to what the timber sector witnessed 15 to 20 years ago.
In investing, timber is viewed as the cousin of agriculture. Both are grouped into a sub-asset class commonly referred to as real assets. The real assets category includes multiple sectors such as commodities, agribusiness opportunities and farmland investments.
Acquiring U.S. farmland through the public markets has historically been challenging. Arguably, it still is because U.S. farmland ownership remains highly fragmented. Currently, the majority of U.S. farmland is owned by families, who tend to pass on these farms from generation to generation.
But not all of today’s farmland owners are in the business of agriculture. The U.S. farmland market consists of about 922 million acres, which is nearly double the size of the U.S. timberland market. Small family farms own roughly half of this farmland. But they contribute to only 25% of total U.S. agriculture production. These owners often have little desire (or ability) to invest capital in the underlying land, and in buying modern equipment and technologies to boost agricultural production.
Larger-scale farms, which are family-owned or otherwise, are better able to benefit from economies of scale. Using outside capital to invest in the latest farming techniques and equipment leads to higher farmland yields. This has important implications for the future needs of our growing global population.
Greater agricultural demand
The global population now includes about 7.2 billion people, according to United Nations (UN) data. By 2050, the UN expects this number to rise by about two billion. In order to feed the additional two billion people, the UN’s Food and Agricultural Organization estimates food production would need to increase by 60%.*
Over-farming and urbanization in many developing countries have lowered the availability of arable farmland. In addition, the expansion of the middle class in developing countries has produced a need for greater amounts of agriculture supply. The supply shortage will likely be filled by outside markets, such as the U.S.
The need for more agricultural production, the abundance of healthy U.S. farmland and an ownership structure that calls for heightened oversight and capital could make agriculture a valued long-term investment.
It isn’t only the increasing need for agriculture that could make U.S. farmland an attractive investment. Many macroeconomic factors have also benefited the agriculture industry.
The most cited factor is the growing global demand for protein, a direct result of rising wealth in emerging countries. A secondary factor is the rise of biofuel usage. Both of these trends boosted demand for a larger variety of agricultural products, including commodities produced in the U.S. like soybeans and corn.
These trends are healthy signs for a future of investing in U.S. farmland.
Putting dollars in soil
We believe there are three core benefits to agricultural investing. First, agriculture can provide potentially strong risk-adjusted returns that compare favorably to other asset classes.
Second, the return profiles of agriculture investments are independent of other financial investments. This enables the asset class to add portfolio diversification as a result of low correlations. And third, returns in agriculture can be positively correlated with inflation.
As the number of investors focused on farmland investing continues to increase, the key question will be how and in what timeframe the current ownership base will transfer to more financially-oriented investors. For now, there is no answer.
The U.S. timber sector serves as a guidepost for agriculture. Its recent ownership shift to more financially savvy investors was impacted by changes in regulation and timberland management. The U.S. farmland sector will likely follow its own path and timeline because of its unique characteristics.
In the meantime, we will keep a close and careful watch as many investors are eager to take advantage of this budding opportunity.
*Projections are offered as opinion and are not reflective of potential performance. Projections are not guaranteed and actual events or results may differ materially.
Real estate investments are relatively illiquid and the ability of an investment to vary its makeup in response to changes in economic and other conditions is limited. Property values can be affected by a number of factors, including, inter alia, economic climate, property market conditions, interest rates, and regulation.