Jan 082013
 

This is a guest post by Peter Thompson. He is the founder of the boutique firm GreenWorld Forestry and Farmland Investments. GreenWorld concentrates on offering “real assets”, and greenworldbvi.com have been particularly popular.

For a small investor with an adversity to risk it is very difficult to find investments that keep up with real inflation.  By real inflation, we don’t mean the inflation reported by government statistics, I mean the inflation we all see when we shop for groceries or when we fill the car and generally the inflation we see are out shopping.

Another concerning aspect for the small investor, one the worries many people about their savings, is the safety of cash on bank term deposit.

What will happen when the next big leg down in the current economic crises occurs, will the banks we have our money in be secure? Will governments be capable of honouring bank guarantees? How safe are the banks in Europe? If there is a major economic collapse, which inevitable, how safe will deposits be? Could a government which is suddenly faced with massive claims on government guaranteed bank deposits schemes, be able to make good such guarantees

These concerns have lead we at GreenWorld – as well as many of our clients – to a favourable view of agricultural land as investments.

Many people have discounted farmland as an investment option due to the inflated prices paid for land in in agriculturally subsidised Europe, the western parts of the European Community. That view changes, however, when people discover the options available of investing in countries which have not suffered from spiraling land prices.

For example, the price of high quality arable land in Africa is extremely low, and the introduction of western farming methods can frequently produce huge returns for investors. Whenever I speak to people about investing in Africa one of the first responses is “how risky is that” or words to that effect. Investors see a possibility of civil war and problems of corruption. These concerns were my own too.

These concerns are real, but in Sierra Leon for example – where one of GreenWorld’s three farmland investments is located – we think they are of acceptably low risk, especially as Sierra Leone has developed extremely close relations with the UK and has made it official government policy to promote and support foreign investors.

In our view, a well run farming project in a small, stable (over the last decade or more) African nation offers more safety than the badly managed and corrupt economic system prevailing across Europe and many Western Countries, where printing money and more debt are the only “solutions”.

Speaking of printing money, as a hard asset, farmland is also an excellent hedge against inflation. Farmland is a “real asset”, and as such, more of it cannot be created or printed into existence by global central banks. With western central banks having already engaged in extensive Quantatative Easing (QE), and likely to engage in further QE as well, investors would be well-advised to consider adding inflation hedges to their portfolios.

Another reason to look at adding farmland to a portfolio is that it is a wonderful way to access a critical, long-term global macro-trend; namely, the combination of a rising global population combined with shrinking arable land. Indeed, as the graph below demonstrates, this trend is very real. It is the most basic rule of economics – if the demand foor something goes up (rising population with more mouths to feed) and the supply of it goes down (shrinking arable land), the investment fundamentals will be very, very favorable.

13_01_farm_guest_population

Finally, many people look at farmland and think it involves purchasing a farm, hiring people to farm it, and other major logistical concerns. What many are not realizing, however, is that there is a new trend in agriculture investing to make farmland available to individuals as a purely passive investment.

Whilst farmland investment has indeed been dominated by larger institutions historically, in just the last several years a number of options have been developed for individuals. The most common is for a project developer to own and operate a large farmland project, and then offer parcels of it to individual investors. Under this model, farmland becomes a purely passive investment, as the he project developer will handle all of the logistics of the project, from the planting to the harvesting to sale of the crops.

The conclusion? If you have never considered investing in farmland previously, it may well be worth taking a look at this asset class now.

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6 Comments on "A Macro View at Farmland"

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Brett @ wstreetstocks
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Brett @ wstreetstocks

Very informative article, farmland can definitely be a wise investment. Climate change and other factors can make farmland a very valuable asset.

Liquid Independence
Editor

For sure. Some investors are saying hard assets will appreciate by more than the stock market will in the next decade. Farmland is a great balance of yield and appreciation over time 🙂

Pauline
Guest

Owning land in three developing countries, I can certainly see the advantages and appreciation. But where there is reward there is risk. Be sure you go with a reputable lawyer and do your due diligence first.

Liquid Independence
Editor

:0) Doesn’t get a whole lot more diverse than 3 different countries. Yes, make sure to follow all the laws because each nation will have different rules about foreign ownership, etc.

Jerry Davis
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Jerry Davis

Investment in farmland, while having potential for excellent returns over the next decade, must be evaluated according to the method of investment. If you plan to own land outright, then local farming experts will be essential, along with assurance of transport and a timely market. For most investors, a third-party process with expertise in multiple elements of financing, cultivation, storage and marketing, is the most prudent course of action.

Liquid Independence
Editor

That would be ideal. A complete system with expertise in each process of the downstream would probably get the best return over time. For my farm right now I just have a simple deal with farmer. He sells his crops to a grain elevator and pays me rent, but maybe we can partner up and think about other ways to get the crops to market at a later year ;0)

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