By Nigel Hunt and Veronica Brown
LONDON, July 2 (Reuters) - Funds are increasingly looking to invest in farmland as a rising global population and changing diets lead to growing demand for food crops.
But the emergence of the asset class is not without pitfalls with the provision of food always highly political and a tentative global economic recovery potentially threatened by the H1N1 flu pandemic, fund managers said.
Some international development organisations have expressed concerns that farmers' rights in developing nations could be compromised by what some see as a "land grab".
"The case for farmland can be summed up in two words as far as we are concerned, food security," Susan Payne, chief executive of Emergent Asset Management, said at three-day World Agri Invest Congress which concluded on Thursday.
Payne said there were great financial rewards from investing in farmland, citing factors such as a shrinking supply of arable land due to climate change, increased production of biofuels and the rapid rise in the global population.
Meat consumption in China is also on the rise, further straining available resources. It takes several pounds of grain to produce a pound of meat.
Payne said Chinese meat consumption had risen to about 40 kg per capita from about 10 kg in the 1980s.
Craig Swanger of Macquarie Agricultural Funds Management said food security also had a flip-side and any government "lock-down" could deal a severe blow to the sector.
There were food riots last year as prices rose across the world. Several governments imposed export controls in a bid to dampen local prices and ensure there were sufficient supplies.
"If the sector hasn't established credibility as an asset class by that stage (the lock-down) it could kill it before it gets started," Swanger said.
The transfer of hundreds of thousands of hectares of land in Africa, Latin America, Central Asia and Southeast Asia has raised concerns in the international community.
"Lands that only a short time ago seemed of little outside interest are now being sought by international investors," a recent report released by several international groups including the United Nations Food and Agriculture Organization, said.
"This is rightly a hot issue because land is so central of identity, livelihoods and food security," it added, noting rising agricultural commodity prices were making the acquisition of land an increasingly attractive option.
Fund managers at the conference, asked to opt for the most attractive areas to invest, mainly targeted regions with abundant resources of water.
"Water is absolutely key for farming investments," Payne said, adding countries such as India and China would face growing shortages of water over the next 10 years.
Clear land title was also seen as vital with fund managers reluctant to invest in countries like Ukraine where they can only purchase limited term leases.
Payne said her preference was to invest in Africa with countries such as Zambia having abundant water resources.
"It (Africa) is the lowest hanging fruit, no question for me," Payne said.
Mark McLornan, founder of Agro Terra, also said Africa could be attractive, although investments could face a "long, bumpy road". His company is heavily invested in Argentina.
McLornan said Argentina's advantages included soils that did not need potash, an expensive fertiliser, and there was also accurate data on rainfall dating back about 30 years.
"I know I can increase yields through accurate data," he said.Swanger recommended investing in Australia, particularly its dairy sector, among developed countries while for a more transformational opportunity his tips included Kazakhstan and parts of Brazil. (Editing by Sue Thomas)