Alternative Investment: Farmland (3 of 8)

Alternative Investment: Farmland (3 of 8)

alternative-investment

Productive agricultural land is a tangible asset that can be directly owned and offers the prospect of both regular income and capital preservation

Risk Level

'Farmland' is Risk Level 3 of 8 in Alternative Investments.

Investment Case

Strong Fundamentals

Demand for land and soft commodities is being driven by strong macro-economic trends. The most notable macro trend is the increase in global population which hit 7 billion at the end of 2011 and is predicted to reach 9 billion by 2050 according to data from the United Nations Population Division. This is estimated to average an increase of about 75 million people a year.

In addition, as Asian countries such as India and China grow richer their populations are eating more meat, which in turn requires more grain to feed livestock. It takes 7 pounds weight of grain to produce a single pound of beef.

Stability And Diversification

Farmland is a classic defensive investment and can be both a store of wealth and provide regular income in recessionary environments - whatever happens in the wider economy, people need to eat. Farmland has a low correlation to many other asset classes and has outperformed traditional asset classes over the long-term. In 2008, when many stock markets were down by over 40%, farmland values increased by over 15% in the US according to the NCREIF Farmland Index. Other locations witnessed similar rises.

Under-Owned Asset

Despite the strong fundamentals supporting farmland investment, it is still an under-owned asset. In many cases the barriers to entry and costs of transaction are prohibitively high and many institutional investors have been constrained from investing in the sector by their benchmarks, strategies and investment memorandums.

Widely reported food price spikes in 2008, 2010 and the summer of 2012 are testament to the growing mismatch between supply-and-demand for agricultural produce. The activities of state-backed investment funds, such as the Chinese government-run Heilongjiang Beidahuang Nongken Group, which recently purchased over 800,000 hectares of land in Argentina, demonstrate how seriously the issue of food security is being taken.

Findings

The majority of investments in this sector were launched in 2010 and 2011. They emerged on the back of the 2008 financial crisis: a global event which increased investors’ appetite for more diverse assets not correlated to the stock market. In addition, the widely reported global food price spikes of 2008 increased awareness of the need for investment in agriculture.

The products offer an even split of defined and open-ended exits. A defined exit project is dependent on a certain level of funds raised resulting in good land production; an open-ended exit strategy requires commitment to a more speculative play.

All the products offer annual returns from year one, derived from a regular harvest income, but only one product has the confidence to offer a fixed annual return.

Ownership structures vary from beneficial ownership to investors purchasing a lease or sub-lease, to a UCIS. What happens in the event of a provider default may be open to scrutiny.

Geographically, most of the projects are located in emerging and frontier markets where land is cheaper, harvest yields are potentially higher - but risks can be greater. Notable exceptions are projects based in the UK and Australia, where returns on offer may be lower – but this is reflected in the lower level of risk.

As well as the investors’ tenure over land, other areas that need to be prioritised in the investment equation are the experience of the operating company farming the land: the initial land valuation and its quality, as well as the proposed use of funds provided by investors. Many products remain opaque on this point and every effort should be made to ascertain how much of the money raised is used directly on the project and how much is used to pay the product provider or fund distribution.

Ongoing charges include the costs of the appointed farm operator and may not always be made clear, despite being taken from investors’ returns –a variable cost that can add an unquantifiable risk to the investment. A lack of transparency therefore can make assessing some of the investment opportunities difficult.

Good projects in this sector feel like responsible investments. Whilst they may not trumpet CSR credentials or have a green halo, putting money to work to help produce food for a hungry planet is a productive use of capital and should benefit us all.

Summary

Farmland continues to be an attractive area of investment. The fundamental case for investing in farmland has only grown stronger throughout 2012 and the prospect of largely uncorrelated, genuinely diverse returns appeal to investors.

Directly held farmland products can offer access to the sector with relatively low minimum investment levels and strong returns on offer. However, few have mature track records of any significance and so the apportionment of investment funds and progress on the projects and harvest yields, for now at least, remain opaque.

Investment Fundamentals

  • Future demand for food
  • Direct purchase of land
  • Annual returns from year 1
  • Emerging markets with cheap land
  • Counter-party risk - farm operator/manager

Investor Conclusions

For investors and agents, directly owned farmland makes sense within a portfolio – it is a defensive investment that does not rely upon strong economic growth and provides returns that are not correlated to traditional investments. But any investment needs to be carefully researched to ensure the model makes sense and the risks are understood.

Investors need to be confident that they are paying a fair price for their land, that the land is (or will shortly be) productive and that there is a market for the crops and a distribution chain in place to ensure they get to market. Investors need to be certain that they are not inadvertently investing in a land-banking scheme dressed up as an agricultural investment.

Please Share This

If you’ve found this page of interest, please would you kindly send a link to it to your friends and colleagues using the buttons below.  You’ll be helping us out, and they might like it too.  Thanks, it's much appreciated.

 

AJ Bell Is Often The Best Value SIPP For Stockmarket Assets

That's our opinion.  Not just because AJ Bell was the first company to offer an online SIPP.  Nor that it's received many prestigious awards.  And not even because the wife of SIPPclub's Founder has an AJ Bell SIPP.  It's because it's one of the most competitive stockmarket SIPPs on the market. 

Over time, charges can wipe out a huge part of your fund.  We like AJ Bell because there are no set-up costs.  If you hold passive funds, which is our preference, or shares, investment trusts, EFTs, gilts or bonds, you pay one small fixed fee no matter how large your fund.  And when you come to draw your benefits either as occasional drawdown or UFPLS payments, there's a small charge for the whole year no matter how many times you access your money (many SIPP and SSAS providers charge more than this for each payment).  However, you should always compare charges in detail, because AJ Bell could be more expensive than other providers, depending on the type of stockmarket assets you hold.

Visit AJ Bell

Get Valuable SIPP And SSAS Insights Emailed Directly To Your Inbox Every Monday

  • Please use an email address you can access. You can unsubscribe at any time.
IMPORTANT NOTE: NOTHING FEATURED ON SIPPclub IS EITHER AN IMPLIED OR A SPECIFIC RECOMMENDATION TO MAKE, OR TO REFRAIN FROM MAKING A FINANCIAL DECISION.  THIS PAGE HAS NOT BEEN APPROVED AS A FINANCIAL PROMOTION.

As SIPPclub neither advises on, nor arranges, nor recommends specific investments or strategies, we're unable to say whether a SIPP or SSAS or any investment within it is right for you. Ultimately, it’s your money and your decision, and you should only proceed once you're satisfied you've undertaken sufficient due diligence. If you need advice, you should speak to your trusted adviser, or you could find a local adviser from Unbiased.co.uk.  Alternatively, we'd be pleased to introduce to a suitably qualified independent financial adviser.

Please read our full Terms which includes criteria for SIPPclub membership.