“Buy land – they’re not making it any more”*

After five years of strong returns and strong fund raising, farmland funds are running up against local opposition and rising political risk

After several years of increasing popularity as a real asset investment, farmland investment is stalling. Political risk, questions over land rights and the practical difficulties of buying large tracts of land are creating uncertainty as growing investor interest meets agricultural reality.

Robust investment returns led to a surge in fund raising in this sector, but activity is now falling back to post-financial crisis levels. In 2015, nine agricultural funds raised a total of $3.9 billion, according to Preqin – a significant increase on the five funds that raised a total $500 million in 2009. By contrast, in 2016 only two funds have closed, harvesting a total of $200 million.

Uncorrelated returns

Large institutional investors such as pension funds have quickly allocated money to farmland funds, attracted by relatively high returns that are not correlated to the prices of financial assets. Consequently, there are 43 farmland funds worldwide with a total value of $10 billion. But the political, social and real-world realities of investing are making some think again.

This is a success story driven by the undeniable fact that the world’s population is expanding rapidly. By 2050, it will grow to 9.6 billion, up from 7.3 billion in 2015, according to the United Nations report “World Population Prospects: The 2015 Revision”. Food production has to increase by 70% by the middle of this century to cater for that. According to a UN-backed forum on sustain-able development held in Iceland in 2007, in the next 50 years agriculture will have to grow more food than it has in the last 10,000 years.

Returns from farmland investment have been strong. In the US for example, the National Council of Real Estate Investment Fiduciaries’ (NCREIF) Farmland Index – a measure of the investment performance of a large pool of individual agricultural properties acquired in the private market for invest-ment purposes only – has returned an annual average of 8% a year from 2010-2014 (lifted by capital appreciation and income). However, returns in 2015 were down to just 4.3%.

As allocations to the asset class have risen, there has been a learning curve. When foreign investors start buying large tracts of land previously owned by local people they can quickly provoke social – and therefore political – sensitivities. For example, Brazil introduced a law in 2010 restricting foreign investors from owning farmland, concerned that countries such as China might buy parts of the country. However, the government has recently announced plans to lift this restriction.

There is also the issue of political risk. The best returns from farming are often available in complicated places such as Ethiopia, Ukraine and Russia. Yet in some of these countries there can be difficulties enforcing ownership rights. Finally, farms are not often sufficiently large for the managers of funds to easily achieve the efficiency gains and economies of scale that they seek.

So farmland investing appears to be at a crossroads. Agricultural imperatives demand the investment and efficiency gains on offer if production is to rise to the challenge of feeding the world’s burgeoning population. But as the emerging uncertainties seem likely to slow the pace of investment for some time to come, so the days slide past. What price, land?

*Mark Twain

9th September 2016

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