We live in a time of huge economic and polit-ical turbulence, which has seen over recent years the f light of capital to real commodi-ties and tangible assets. Early on in this phase of the cycle evidence of this trend was seen in the soaring price of gold and has since moved into global cities including prime Central London and, of course, into agricultural commodities and farmland markets.
No sector has been more affected by this phenomenon than agriculture. It is seen as a safe haven for capital and a hedge against inflation, as well as a means of feeding a burgeoning population – which has an increasing appe-tite for the western style of protein based diets. It is not surprising Sovereign Wealth Funds, family offices, cor-porate and private investors remain active players in this marketplace.
As with all investments, quality, location and timing of purchase and disposal can make a huge difference to overall performance. The question is when, and in which country to invest?
Historically, capital appreciation has been the main reward for investors. Savills Rural Research shows the most significant growth over the past 10 years has been in the emerging markets of South America and Cen-tral Europe. Entry into the EU accelerated growth in Romania, Hungary and Poland, although restrictions on foreign investment in farmland still apply. By way of example, land values in Romania increased by 1817% between 2002 and 2010, with growth of 172% since accession to the EU in 2007. Despite this significant increase in farmland values, Romania still has some of the cheapest farmland in the EU.
Farmland values in South American countries have also strengthened significantly over the past decade, albeit from a relatively low base. At the start of the millennium $800 could buy one hectare of land in Brazil; by 2010 that hectare cost more than $5,200. The pattern has been similar in Argentina. Legislation relating to foreign investment in both countries has, to some degree, dampened this growth in recent years, but values continue to rise more moderately.
Under Pressure
Meanwhile, the more mature markets of Western Europe have been under some pressure. Average farm-land values have f luctuated recently, with a period of accelerated growth followed by a correction in values in Northern Ireland, the Irish Republic and Denmark. French land values have remained relatively low and stable; here, the Societe d’Amenagement Froncier et d’Etablissement Rural, (SAFER) approves all land acquisitions and encourages sales to local farmers, making it more difficult – but not impossible – for investors to purchase.
Great Britain appears to be an exception, reporting a significant growth in values between 2007 and 2011. Together with the US, Australia and New Zealand, it confirms that excellent returns can still be achieved in the mature farmland markets.
According to Savills Farmland Value Survey, the average value for all types of farmland across Great Britain rose by 12.3% to £6,058 an acre during 2012. This follows an 8.2% rise in 2011. However, these figures conceal wide variations between property types, with demand focused towards large commercial blocks of unencumbered arable land. The average value of prime arable land in the east of England now exceeds £8,000 per acre and already this year there have been a number of transactions both on and off market at over £10,000 per acre. Farmland has significantly outperformed most other assets over the past 10 years and has been compa-rable with alternative assets over the past 30 years, with the exception of residential property. Growth in the first quarter of 2013 has even outperformed Prime Cen-tral London property.
In the US a similar picture has emerged, with farm-land outperforming all other assets between 1995 and 2010. Between 2002 and 2010, average cropland values there increased by 75% – albeit at varying annual rates. Rates of growth in both Australia (300%) and New Zea-land (262%) have exceeded those in the US and Great Britain over the past decade, with farmland proving to be a strong investment choice.
With higher commodity prices and the opportunity to invest in areas where farming has historically underper-formed, income return can also be significant. Income way of assessing investment spend relative to output is to determine the cost of acquiring land in order to grow a tonne of wheat. With the world wheat trade forecast to double by 2050 to 240 million tonnes, this analysis gives a clear picture of the areas that potentially represent good investment value. Savills Rural Research shows that in Denmark, Ireland, New Zealand, Brazil, the UK and US, a land cost of more than US$2,000 will be required to pro-duce a tonne of wheat, whereas in Australia and Hungary the same output will incur a land cost of well below $1,000.
This is a good place to start, but successful invest-ment is ultimately a matter of balancing the potential for output and capital growth with a reasonable risk profile. There are always risks, but these are manage-able providing any investment is supported by local knowledge and delivery. The following factors need careful consideration:
robust entry and exit strategies.
growth and output of crops and livestock. There can be
significant variations between regions within a country,
and weather conditions will fluctuate from year to year.
long-term economic wellbeing of a country for future
economic sustainability.
where the advantages of economies of scale can be
tapped into and income returns maximised, is not
available in every country.
farms and to transport outputs to markets economically. become an integral part of farm incomes. Current and long-term agricultural policy is hugely influential.
-eration as part of the longer term investment strategy.
investment is probably the most important area to under-stand, as the success of the whole investment will hinge on the land being managed by a successful farm business.
Attractive areas
Both Brazil and Australia score highly on these counts. The opportunity for large-scale farming is a key driver in both countries, but location is critical, with the best opportunities requiring adequate rainfall/water, good soils and infrastructure. Western Australia seems par-ticularly attractive. It is close to Asia, has an export-orientated, highly efficient arable sector and costs of acquisition are low in comparison with other grain producing regions globally. The Australian govern-ment takes agricultural productivity seriously, spending approximately Au$1.5 billion on agriculture and rural research and development annually. All of this adds up to an attractive opportunity in a nation that has seen con-sistently strong GDP growth over recent years.
Central European countries also score relatively highly, with the exception perhaps of Hungary. This is driven by strong potential returns from good agro-nomic performance and the opportunity for large-scale political and economic uncertainty and restrictions on foreign ownership.
The UK still represents a good place for farmland investment. Savills Rural Research forecasts growth of 40% over the next five years for average farmland vales across Great Britain – a trend likely to mirror the prime central London residential market.
Unsurprisingly, like any investment, the best returns often come with the highest risks. There is a reasonable amount of acquisitive activity in Africa and the avail-able evidence does suggest this is a continent with high growth potential in the agricultural sector.
Long-term under-investment offers exciting oppor-tunities, but the risks are high due to political and eco-nomic uncertainty. Investors wanting to access this and develop a Greenfield asset (‘primary market’); or source and acquire one of the limited developed farms (‘secondary market’).
In conclusion, the future of farmland as an interna-tional investment remains positive. Agriculture will be fundamental to feeding growing populations and the prime asset, along with water, is land. However, the farm-land market is diverse and requires a thorough under-standing of the industry. The issues extend well beyond those that impact directly on the farming operations, encompassing a whole range of political and economic factors. Risk appraisal and due diligence are essential for underpinning any investment strategy.
