A January 3rd article in The Economist highlights the fact that “in the next 40 years, humans will need to produce more food than they did in the previous 10,000 put together.”

Give the growth of urban areas and deserts over the last few decades, many experts are starting to question whether there will be enough arable land to support that kind of growth in the food supply. Taking the discussion to the next level, both agricultural researchers and policy makers are trying to get a handle on what kind of technological innovations it will take to make the shrinking amount of arable land productive enough to meet the growing food needs of humanity.

new farmland index return Farmland

Farmland has been excellent investment

The Economist article points out that farmland has been a phenomenal investment over the past two decades, especially in the U.S. In the U.S. and UK, tax incentives have distorted the market for farmland, leading it to outperform nearly major asset classes over the past 10 years, and with relatively low volatility.

Some analysts say the farm boom can’t go up forever and are calling it a land-price bubble. Farmland bulls say that increasing demand and shrinking supply, urbanization, poor soil management and limited water for irrigation mean that prices have nowhere to go but up.

Financing the farm boom

Institutional investors such as pension funds have been moving into farmland over the last few years, in some cases making their own deals or working with agriculture specialist funds. Some investors act as landlords and just buy farm land and lease it out. A growing number of investors are purchasing relatively low-value land, such as pastures, and upgrading them to higher-yield agricultural crops or orchards. Investors who are willing to tolerate risk for greater reward have invested in farmland in Brazil, Ukraine and Zambia, where farming methods are old-fashioned and the potential for huge productivity gains exists.

Bruce Sherrick of the University of Illinois at Urbana-Champaign notes that it’s not just the asset appreciation and high yields that are bringing in institutional capital, it is also the portfolio diversification you get with farmland. It’s value is not connected to typical financial assets such as stocks and bonds, it’s relatively resistant to inflation, and is also much less sensitive to economic shocks and to interest-rate hikes.

Back in 2009, Qatar’s sovereign-wealth fund worked with Bydand Global Agriculture to purchase around 50 farms in Australia as a single investment portfolio. Also of note, PE firm Terrapin Palisades snapped up a dairy company and some vineyards and tomato fields in California, and switched production to almonds (the price of almonds has skyrocketed with increased Chinese demand). Keep in mind that switching crops requires significant capital and you must wait several years for returns.

H/T Climateer Investing