Farmland investment benefits from favorable macro fundamentals that are poised to enhance farmland values for years to come.
Global population continues to grow and is projected to increase from the current 6.7 billion to over 9 billion by 2040. This expanding population will demand ever increasing agricultural production of food. In addition, as incomes rise in the populous emerging markets, there will be greater demand for a better diet which typically means more meat. Meat requires more grain feedstock as compared with direct human consumption of grain. For example one pound of beef requires seven pounds of grain feedstock and one pound of chicken requires two pounds of grain.
Heightened awareness of global warming has led to an increased demand for alternative energy sources, and farmland owners are uniquely positioned to benefit from this development. Currently the feedstock for biofuels in the United States is corn for ethanol production and soybeans for biodiesel. The efficiency of corn based ethanol is improving exponentially as revealed in a recent study published in the Journal of Industrial Ecology. In time, technology will permit the addition of cellulosic biofuels made from switchgrass, cornstalks or other fibrous feed-stocks, but farmland and farmers will still be needed to plant, maintain and harvest these alternative crops. In addition, recent interest in wind energy will lead to increased demand for farmland to locate wind generators.
The supply of arable land capable of efficiently growing agricultural crops is limited, and in the United States the supply is shrinking. In addition, global supplies of fresh water for agricultural production are being depleted rapidly. Technological advances that allow higher yield production from existing farmland somewhat helps the supply imbalance but these advances also increase the per acre revenue of existing farmland and thereby increase their value.
The United States agriculture sector produces 25 percent of the world’s food supply. In addition it benefits from its modern technology, efficient farm production methods and superior transportation, storage and processing infrastructure. In short, agricultural production is one of the few remaining sectors where the U.S. is the low cost producer. Consequently, global demand for U.S. agriculture will continue to expand as long as international trade prospers and is not constrained by protectionist constraints.
Historically, farmland investment returns are negatively
correlated with traditional asset classes such as stocks and bonds. In addition,
most investors have very little investment exposure to commodities generally or
farmland specifically. For these reasons farmland offers favorable
diversification for most portfolios which can reduce a portfolio’s overall
volatility while enhancing its return.