Fund farm buying 'only just begun' - even at $40bn
Agrimoney 5.12.2012

Fund farm buying 'only just begun' - even at $40bn

The wave of fund investment in farmland has reached only a fraction of its potential, even after hitting up to $40bn, with the potential to hit $1,000bn as it gains a "natural home" in portfolios.

Macquarie, estimating that institutional investment in farmland had reached "a modest" $30bn-40bn, said there was "significant" scope for funds to increase their ownership of a sector worth an estimated $8,400bn overall.

"What may be surprising to some is that this interest is only just starting to flow into the sector in the form of investment by institutions," the bank said, estimating the total amount of "investible" land at $1,000bn.

"Investors and advisers alike are looking to better understand the size and structure of the investable asset base before committing resources."

'Significant scope'

However, the sector offered a "compelling" opportunity, including changing the "predominantly fragmented" nature of land ownership, creating larger blocks which are more efficient to farm.

Farmland value by country and (% of value attrbuted to arable land)

US: $2,640bn, (59%)
Brazil: $692.5bn, (48%)
Argentina: $425.3bn, (51%)
Australia: $298.1bn, (73%)
Canada: $209.4bn, (8.8%)
Russia: $177.6bn, (21%)

Sources: FAO, Macquarie

"While areas such as the US have higher levels of institutional investor ownership, farmland ownership globally is heavily dominated by family farmers who both own and operate their farms," Macquarie said.

"Given the small scale of the average farm globally, and the challenges for such businesses accessing capital, the scope and need for institutional capital to be deployed in agriculture in order to improve efficiencies and generate higher returns is significant."

"One of the attractive factors from an investment perspective is the opportunity for consolidation given the importance of scale in driving returns from agriculture."

'Warrants an investigation'

Separately, Oakland Institute said that the "private financial sector" had invested $10bn-25bn in farmland since the 2007-08 financial crisis raised the profile of agricultural investments as an asset class little correlated with many mainstream assets such as shares.

And "given current investment trends, this amount might double or triple in the coming years".

However, the group - which campaigns for increased transparency about land deals, amid concerns over the social and environmental implications of some investments - cautioned that this investment represented a potential threat.

"Although agricultural funds are portrayed as positive social investment to help alleviate hunger… evidence demonstrates that large land deals are often detrimental to food security, local livelihoods, and the environment," the US-based organisation said in a report into investment in land.

The "large buying power" of the funds buying farmland "warrants an investigation into the overall impact of this investment activity on economic development, food production, rights of local communities, and the environment", Caroline Bergdolt, one of the report's authors, said.

'Uncorrelated, positive returns'

Macquarie's research also flagged the appeal to investors of farmland given movement in prices which correlates little with that of many other assets.

This is an important consideration for many investors in times when many apparently unrelated investments tend to move in line, swayed by "risk on" or "risk off" market moods.

"Owning farmland has the potential to deliver uncorrelated, positive returns over the long term," Macquarie analyst Samuel Morris, said.

"An internationally-diversified portfolio of agricultural land could contribute significantly to delivering positive, uncorrelated capital returns compared to other asset classes, while lowering portfolio risk."

Farmland also offered the potential "to provide exposure to soft commodity price inflation, without the volatility that comes from pure exposure to the commodities".
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