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Geopolitical Monitor

Geopolitical Monitor

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Why Investors such as Jim Rogers and George Soros are Interested in Farmland

Farmland has two important attributes that set it apart from most other investments. The first is obvious: its inelastic demand. Humans need food to survive, it’s just a question of what food they eat. Second are the various political and environmental factors that continue to whittle away at an already-finite supply of global farmland: factors like climate change, urbanization, farmland degradation, and erosion. According to the WWF, one-third of the world’s arable land has been destroyed since 1960 by erosion and other types of degradation. Though we’ve heard it all before that ‘they aren’t making any more land,’ it turns out that we are also good at ruining what little we have.

This slowly dwindling supply must be juxtaposed to a level of global demand that is only going up.  It’s not just the growing global population (8 billion people by 2025 according to the World Bank) that will drive increases in food demand, but also the socio-economic changes that are already altering consumption habits all over the world. As the middle class of countries like China and India continues to swell, their diet shifts from being primarily vegetarian to including a lot more meat, which is more grain-intensive and thus places a greater demand on food producers.

Consider Cornell Professor David Pimentel’s assertion that if the grain used to feed the livestock required for US beef consumption was just eaten directly instead, it could feed over 800 million people. Now extrapolate this dynamic across an Asian middle class that will easily number in the hundreds of millions, and you have some of the economic rationale behind the global farmland boom.

These fundamentals have piqued the interest of many investors around the world, including big names such as Jim Rogers and George Soros.

Related Article: What Investors Should be Looking out for in 2013

Farm prices in the United States have also been rising at a steady clip, posting double-digit gains every year since 2005, with the sole exception of a brief recessive blip in 2008. This year, a survey by the Federal Reserve Bank of Chicago revealed that farmland across Iowa, Illinois, Indiana, Wisconsin, and Michigan has increased in value by an average of 15 percent.  These kinds of gains have some people worried the potential for an agricultural bubble, but others are quick to point out the relative security of farmland vis-à-vis unsettled equity markets and the inevitability of spiking food demand.

The frenzy to buy farmland in the United States has even spilled over to Brazil, where US farmers have bought up land at a fraction of the price it would cost north of the border. This prompted the government of Brazil to pass a law restricting the amount of foreign ownership to 25 percent per municipality. Government intervention to stop large influxes of foreign investment has increased worldwide as arable land is increasingly seen as a strategic resource, and this is a factor that should be taken into account by people investing in agricultural ETFs or companies with large farmland portfolios. Another example of land protectionism is the ‘Rural Land Law’ that passed in Argentina in 2011. This law limits any foreign ownership of land in Argentina to 1,000 hectares.

Another potential pitfall for farmland investors lies in the increasing unpredictability of global weather patterns. While it’s certainly true that global food demand will be trending upwards, there are no guarantees that a given patch of arable land will remain productive enough to reap the windfall. Given the large gaps in understanding that exist within climate science, it’s always possible that the record droughts experienced in the United States and Argentina in 2012 will one day become the rule rather than the exception.

By. Zachary Fillingham

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Leave a comment
  • procap on January 06 2013 said:
    Some funds that make direct farmland investments:

    Agrifirma - Brazil
    Chess Partners - US
    Black Earth - Russia (operations plus land - listed)
    Landkom - Ukraine (operations plus land - listed)
    Cresud - South America (operations plus land - listed)
    Agcapita - Canada
    Hancock - US
    Farmland LP - US (organic farmland)
    UBS Agrivest - US
  • D on January 07 2013 said:
    why invest and pay management fees, just go buy land yourself in South America. You can set it up in a 'custom' arrangement, and everything gets taken care of for you, but you are the 'farmer' per se...

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