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    The Fundamentals of Farmland Investing

    In the early 2000’s, a sudden realization that the world would need to feed a rapidly expanding population led several US institutional investors to create investment vehicles in farmland. In the early 2010s, famous funds like the Soros Fund Management further invested in companies operating farms in South America. But the main event that shone a light on farmland investments in the public eye was when Bill Gates began investing billions in companies operating farms in the US. After institutional investors first created farmland investment vehicles in the 2000’s, Bill Gates became the largest private farmland owner in America. This article outlines the fundamentals of farmland as an asset class.

    Finite Supply

    One of the strongest arguments in favour of land is that its supply is finite. While the worldwide population keeps on growing, the world needs to make do with the current amount of land that exists.

    This has two implications. First, as the demand for farmland increases, so will its value. Second, farmers will have to produce more and more food out of their land to feed the population.

    This explains why agriculture is an industry that is constantly innovating. According to the EU Commission, the current volume of farmland is set to slightly decrease due to the development of new farming techniques that will enable farmers to produce more on one hand; and due to the will to recreate natural ecosystems on the other. As the demand for farmland increases and the supply decreases, farmland will keep on appreciating.

    Growing Demand

    The value of land is influenced by two variables.

    1. Supply and demand. The higher the demand, the higher the price. As we outlined above, the demand for farmland and farmland product is set to increase due to a growing population.

    2. The value of the output of the land. If the land produces food that increases in value (often due to a shortage), the value of the land will follow suit.

    Since the current predictions indicate that the world will eventually have to feed over 9 billion people by 2050, the demand for and price of farmland are set to keep on increasing.

    Uncorrelated with the stock market

    This means that when the stock market crashes, or the economy enters a recession, the value of land seldom decreases. This is due to the fact that the value of land partially depends on the price and the market for food. Recession or not, people need to eat.

    This explains why so many institutional investors make farmland investments. It helps them diversify their portfolio and decrease risk in case of a stock market crash.

    Follows the CPI

    The CPI is the Consumer Price Index. It’s an indicator calculated from the average differences of the sum of the price of a basket of goods and services.It’s one of the measures available to  compute the path of inflation year-to-year. One of the strongest arguments in favour of farmland investments is the fact that its value increases with inflation.

    While the stock market is expected to decrease in case of inflation in the long term, the price of farmland is set to increase along with inflation.

    Since farmland’s value is tied to food prices and food prices are one of the first things to increase when inflation hits, the value of farmland follows inflation. Farmland is thus one of the few assets, along with gold, that investors can acquire to hedge the effects of inflation.

    Low Volatility of Farmland Investments

    Farmland has low volatility for several reasons.

    First, farmland is not traded on stock markets. That means that the price of farmland at any moment in time is the computed price of all farmland offers available at instant T. Since farmland prices don’t change day to day, the volatility of farmland is low.

    Second, buying and selling farmland is a slow process. It takes at least 30 days (depending on the country) to organize a complete sale and transfer ownership in the official state registry. This means we don’t see some huge swings up and down, unlike stocks which can be bought and sold quickly.

    Third, the volume of farmland investment isn’t as big as in other assets.

    Fourth, unlike real estate or stocks, investors rarely borrow money to buy farmland. This is due to the fact that farmland is illiquid. The risks of buying farmland with borrowed money are too high as it’s not easy to sell the investment to get back into cash.

    Finally, farmland investments are made for the long term. Farmland isn’t an asset on which investors speculate because it’s neither volatile enough nor liquid enough.

    Important Returns

    Farmland has been returning on average two digits in central and eastern Europe for the last ten years.

    combine harvester at work

    There are two key reasons for this. At the end of the USSR, the economies of what are now central and eastern EU countries was less developed, which means that life was cheaper than in Western countries overall. The establishment of capitalism to replace the previous “planned economy” led to an economic boom that dramatically raised both the quality of life and prices. Then farmers increased their output as they adopted better techniques for growing food, and the value of the land followed suit.

    Between 2011 and 2020, the value of farmland in the previously Soviet-bloc EU countries grew from 79% in Latvia to 424% in Romania, according to Eurostat data.

    Tangible

    Farmland is a tangible asset. Like gold or real estate, its value is unlikely to go to zero because on one hand  it
    cannot go bankrupt, and on the other it will always be useful. The fact that land is tangible also makes it resilient.

    Farmland as an asset resists natural disasters and most catastrophes. In case of fire or flood, the harvest for the year is lost, but it will be possible to plant for the next harvest. Unlike forests that can lose twenty years of growing trees in a fire, farmland losses are small since they grow crops over a few months only. Furthermore, losses do not impact the value of the land itself.

    Farmland investment risks

    Farmland, like any asset, isn’t completely risk-free. Fundamentally, there are three risks that could decrease the price of a plot.

    Nuclear Accident

    The first threat is a nuclear accident. As the Chernobyl incidents showed, polluted land lost all of its utility and hence value after the accident. This risk only concerns plots surrounding nuclear reactors. Its chances are estimated to be very low.

    War

    War is another risk. When a country invades another one and takes the land, it becomes difficult for the former owner to claim it back.

    Sea flood

    Finally, the last risk is that land located by the sea, and particularly land already below sea level, could be flooded due to the rising sea levels caused by global warming.

    Summary

    • Land is one of the assets with the strongest fundamentals.
    • It’s also the oldest asset in the world.
    • Humans began trading and assigning private ownership to land some 12,000 years ago when
      we became sedentary.
    • Technology won’t replace the need for the land, and it will always be needed as long as
      humans inhabit the Earth.

    These characteristics make land, and farmland specifically, one of the best asset classes in the
    world.

    Join a free 45-min Webinar on the 23rd of June for a discussion on the economics of farmland and how LandEx, the first crowdfunding platform specifically for farmland investments, can help investors diversify their portfolio. Register your place at Landex Webinar.

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