The World Agriculture Investment Conference, Europe, took place in London on October 4th and 5th. Global demographics are driving the farmland investor story, while owners of farmland are increasingly employing high technology to increase crop yields and bring previously fallow land into production. Despite the recent volatility in financial markets, farmland values continue to escalate in many areas of the world.

This week, the world experienced the birth of its seven billionth citizen. By the year 2050, the world population is expected to rise to 9.2 billion people. This is a dramatic population increase from the level of six billion ten years ago and just two billion people in 1930. While Europe and the Americas currently comprise approximately one-quarter of the world's population, this is expected to decline to less than 20% by 2050, as population grows swiftly in Africa and Asia. In fact, Africa and Asia are likely to add three billion more people to the planet by 2050, while the rest of the world adds only an additional 300 million to the population. In addition to this population growth, Asian consumers are gentrifying, which means an increase in meat consumption relative to grains, which creates even greater demand for water and grain used in animal feed. To meet the needs of a growing, gentrifying population, the world's agricultural output may need to double in the next 40 years.

Given these scenarios of continued demand for, and dwindling supply of, farmland, investors are increasingly becoming interested in adding farmland to their portfolio. In fact, some investors consider farmland the ultimate flight-to-quality asset, as an increasing share of farmland is being purchased to secure future food supplies rather than in the pursuit of investment returns.

Farmland around the world varies in price and productivity. The main drivers of farmland values are the climate and land productivity, governmental regulations on the use and ownership of land, the potential to convert farmland into residential or industrial uses, and the availability of infrastructure, including irrigation, roads, ports, railways, and storage and processing facilities.

Similar to other areas of real estate, investors can participate in farmland investment through direct investments, investment funds or the purchase of stock in companies operating in the agribusiness sector. Farmland can earn significant cash flow yields from operating or leasing the land, with long-term returns similar to equity markets or other real estate investments.

Investors with a lower risk profile will choose currently productive land in areas such as the US, Canada, Western Europe, Australia or New Zealand. More adventurous investors will venture into Africa and other emerging markets. There can be significant profits in converting fallow lands to productive lands, but this conversion process is only for the most experienced and politically skilled operators. These skilled operators are the key to enhancing global agricultural production in the long run, as many areas of the world lack access to capital or the latest farm technology.

Investors can also profit from increases in farmland values by developing and operating their own infrastructure, such as building railways and grain storage facilities. Building private equity funded businesses that connect farmers with global buyers and arranging logistics can improve profits, productivity and open new areas of farming that were previously infeasible due to a lack of infrastructure. Providing capital and the latest in farm technology and inputs can improve crop yields in previously less productive areas. Similar to the operations of global agribusiness firms, profitability can increase by providing the capital necessary to purchase inputs and transportation at seasonally low prices, rather than at the high prices that prevail at the time of harvest and planting when cash-constrained farmers typically make these purchases.

Risk factors for farmland investing include water scarcity, soil degradation, transportation difficulties, changes in political regimes and climate change. Relationships with local and global buyers, as well as local farm operators/lessees are further keys to success in farmland operations.

Keith Black
Associate Director of Curriculum