Finding the best agriculture investment could be tricky to the inexperienced investor with no knowledge with the sector, but you can find of course a variety of options available including agriculture investment funds, direct agricultural land investment, and buying equities in agricultural companies. In this article I will go one method or another to investigating various options, the health risks they given to investors, the mechanics of how every sort of agriculture investment works, along with the returns that happen to be currently being achieved.
Firstly we’ll look at the relevance of agriculture investment with the current overall economy, and whether this kind of sector shows us indication of being able to generate growth and income.
The Current Economic Climate
The global economy continues to be in a state of turmoil, plus the UK for example is lowering public spending to relieve an unmanageable national debt, the people is growing, and quantitative easing may well lead us in a period of extended inflation. Also, deficiency of economic visibility signifies that it is very not easy to value assets for instance stocks, and interest levels being so low implies that our cash deposits are certainly not generating any tangible income to talk of.
So exactly what does this mean for investors? It shows that we have to buy assets which have a positive correlation with inflation i.e. each up in value quicker compared to the rate of inflation, these assets need to generate an income to change the income we have now lost from cash, and ultimately any asset that people purchase need to have a strong and measurable background.
It is incredibly clear that agriculture investment, especially paying for agricultural land, displays the options of growth, income, an optimistic correlation with inflation, is not difficult to value, and has now a clear and evident qualifications to analyse, and thus agriculture investment ticks every one of the relevant boxes to potentially get to be the ideal asset class for investors today.
Agriculture Investment Fundamentals
The fundamentals supporting agriculture investment are pretty simple to measure; as being the global population grows we require more food, to create more food we end up needing more agricultural land because this is the resource that provides the many grain and cereals that individuals eat, and the many space to graze the livestock that finish up on our plate. So we are dealing with an exceptionally basic question of supply and demand, if demand increases and offer can’t continue, value of the underlying asset increases, why don’t we look at a few of the key indicators of supply and demand for agriculture investment.
For seven on the last eight years we have now consumed more grain than we’ve produced, bringing the world store into critical levels.
Since 1961 the quantity of agricultural land per person has dropped by 50% (0.42 hectares per person to 0.21 hectares per part of 2007).
The global human population are expected to grow by 9 billion by 2050.
Most think tanks and experts believe that we’re going to need to increase the volume of agricultural land by 50% to compliment that growth, essentially a productive field the dimensions of greater London have to be found once a week.
In the very last ten years which has no more land has become bought into production as global warming, degradation and development plus a host of additional factors mean that there is little if any more new land we’re able to use to farm.
The underlying asset that creates our food, the land, becomes more valuable fat loss people demand food.
Agricultural land value rise if the food it produces is usually sold for a better price, making owning farmland more profitable, and food price is at a 40 year low, leaving room between 400% price inflation. In fact a bushel of wheat cost around $27 noisy . seventies and today costs just $3.
Farmland in the UK has risen in value by 20% from June 2009 to June 2010, and 13% last year alone based on the Knight Frank Farmland Index.
So the basic principles supporting agriculture investment are sound and also clearly demonstrate a fantastic picture for potential investment. But can we absorb price inflation? Well you can find a countless studies that inform us very clearly that as being a population, we absorb increases in food prices almost 100%, and sacrifice spending in the areas, so yes, we could.
Methods of Agriculture Investment
Agriculture Investment Funds
There a wide range of types of agriculture investment funds to pick from, most buy farming businesses, other purely in arable land, while others by stock in agricultural services companies. Most agriculture investment money is showing excellent growth, and also the fact that they may be buying has grown the level of demand available in the market therefore their mere presence is causing capital growth. Rural agent Savills recently commented within the fact that they have accessibility to £7 billion in capital from fund to obtain farms, that’s enough capital to obtain six times the quantity of farmland which is to be advertised in the UK this current year, the truth is, in accordance with Knight Frank there is 30% less farmland advertised this season from last, and buyer enquiries have risen by 9%.
To speak about risk as it were, danger involved with this fund based investment method that you give over control to some fund manager that will spend your cash for you and find assets that she / he believes are relevant. Also, if a person fund performs badly, very often has a knock on effect for other agriculture investment funds as confidence in this type of strategy has a hot, you’ll be able to therefore lose value through no fault of your family. You also have to repay a fund management fee, eating in your profits.
In terms from the returns you can expect from the fund, this varies wildly but a majority of project annual returns of approximately 10%, even if this will vary according to a whole host of factors such as fund management, investment strategy, and general market conditions.
Buying Shares in Agricultural Companies for an Agriculture Investment
Another selection for chose considering cashing in on agriculture investment is to buy shares within an agricultural business, be that your farming business, or maybe a services business, your options to consider vary in color tremendously and careful thought have to be undertaken to pick out a suitable market (LSE, NASDAQ etc), and then the right company where you can invest. The business of picking shares remains, for me, employment best left to people with the time, experience and resources to carefully investigate the company, its management, also it product line, in support of those company displaying sound fundamentals must be added to some portfolio.
The risk the following is as with any equity based investment, a down-swing available in the market can cause a fantastic company to get rid of value and therefore affect the wealth from the investor in the negative way. We have all seen recently what sort of bear market will bring down profitable companies and also the whole premise of agriculture investment is always to avoid stock markets and add a component of non-correlation to some portfolio, ensuring the investor owns an asset which is unaffected by volatile stock markets.
So does an agriculture investment in the type of shares suit you perfectly? Well certainly not, even as we were looking for stability, non-correlation, a good correlation with inflation and income, and also this mode of agriculture investment ticks none of these boxes in addition to a nominal dividend.
Buying Farmland being an Agriculture Investment
In my estimation the most sensible strategy for investors is always to acquire profitable farmland that has a history of producing an ongoing revenue yield, and rent that land with a commercial farmer. This mode of agriculture investment allows the customer to access a good point that displays each of the characteristics that any of us are looking for, non-correlation with stock markets, positive correlation with inflation, income and growth, as UK farmland will continue to increase in value yet continues to be only half the cost of agricultural land in Ireland, Denmark as well as the Netherlands, leaving an enormous margin for future growth.
There are certainly a number of risks to contemplate here as well, sourcing good land as an example, and certainly sourcing and operating a farming tenant, these risks can all be managed effectively by partnering which has a specialist agriculture investment consultancy which will handle the sourcing of both land and tenant and as well handle all ongoing management too.
So to summarise, if a person is for making an agriculture investment, a good choice right at this moment should be to buy agricultural land, giving the investor growth and income within a volatile market.
David Garner is Partner at boutique alternative investment boutique DGC Asset Management Limited.
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