Why Invest In Farmland?
T. Marc Schober | May 12, 2014 07:04AM ET
Everyone has to eat in order to survive and the production of almost all food can be traced back to farmland around the world in some way. Demand is growing for farmland as the world's population and global needs for food increase. What many don't realize is that the supply of farmland is not changing, thus creating a severe imbalance in the supply and demand of farmland. An investment in farmland over the long-term will provide a steady stream of income and capital gains due to the increasing global demand for agricultural commodities, driven by the rising world population, rapid growth in emerging markets, and continued demand for ethanol and biofuels. Demand for agricultural commodities is outpacing supply, positioning farmland for long-term appreciation. In brief, the following factors are important in driving the fundamental investment rationale for farmland investments: • Cash Returns – farmland is a performing asset, generating modest cash returns of 4-6%, depending on location and crop. • Land Scarcity – there are approximately 3.5 billion acres of arable land in the world with the potential for adding a mere 20% over the next 20 years. • Food Demand – as incomes rise, demand for proteins will increase with corresponding increases in the need for feed grains. Demand is growing in developing countries: The United States Department of Agriculture (USDA) expects exports to rise to as much as $167 billion in 2021 from $82 billion in 2007. • Bio-fuels – agriculture and energy markets are now bound together by federal mandates for renewable fuels. The USDA estimates that 40.5% of the U.S. corn crop was used for gold because of its characteristic as an inflation hedge. However, unlike gold, farmland also produces stable income streams and as a consequence it has been described as “gold with yield.” Farmland is a long-term investment that will be the key to feeding the world’s growing population. Farmland is the one ingredient in food production that cannot be replaced and is a sustainable asset that will last many generations.
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