Farmland as an Asset Class for Institutional Investment
The case for investing in Agricultural Production
- Growing Demand: Agriculture will be challenged to provide food, fibre and fuel to a world population that is predicted to increase by more than one-third to 9 billion people by 2054. This amounts to ~70 million more mouths to feed every year. Higher incomes in the developing world will lead to greater demand for protein per person, multiplying the demand growth.
- Limited Supply: Arable land per person has declined from .52 hectares per capita in 1950 to .25 hectares per capita. Total global arable land of ~1.5bln hectares has been stable for the last 20 years. Urbanisation, land and water resource degradation, climate change, pollution and resource abuse are reducing the land and water available for food and fibre production.
- Diversion to Biofuels: A large and expanding global biofuels industry is requiring increasing amounts of global grain and vegetable oil production.
- Food Security: In 2008 modest global crop disruptions led to sharp rises in food prices, and heightened global awareness of the fragile position of world food supplies. The United Nations and New World economies have acknowledged the world’s precarious food security position. Middle Eastern and Asian countries have made substantial purchases of rural land, especially in Africa and South America, to mitigate their strategic food security concerns.
- Portfolio Contribution: Low correlation with other asset classes provides portfolio diversification. Demand for food, and rural land and water prices have not generally declined during recessions. Australian rural land and water entitlements have historically provided an attractive long term store of wealth, outperforming inflation by 4-5% pa
- Investment vehicles with the scale and governance characteristics to suit institutions are becoming available.
Why Australian Agriculture?
- Australian Agriculture is important in the context of the global sector.
- Farming and rural services represent 12% of Australian GDP, and contributed exports of A$27.5bln in 2008.
- Productivity growth across the sector has been impressive over the medium term; 3.5% growth was recorded in the period from 1994-2005 (ABARE).
- Capital growth of land values has been persistent, with few periods of decline
- World leading farm management expertise.
- Global low cost producer, especially of wheat, cotton, sheep and cattle.
- Disaggregated and small scale family farms pressured by poor competitiveness and by demographic change, with farmers ageing and the next generation attracted to the cities or other industry are making way for corporate farming, characterized by improved efficiency, modern systems and professional practice.
- Enviable transport and logistics infrastructure in place in prime farming areas.
- Proximity to the growing markets of Asia a permanent competitive advantage.
- Low sovereign risk.
Water
- Water is the key scarce resource for Australian farming production
- After 15 years of legislative process, Water Entitlements in the key irrigated valleys are now accurately defined, registered, and traded separately to the land
- The entitlements have risen in value dramatically over their history
- The Federal Government has been buying back water entitlements for environmental reasons
Contact Saltbush to discuss the opportunities for institutional investment in this emerging asset class.