In 2008, the world experienced two ‘f-word’ crises – the global financial crisis, ushered in by the collapse of the US sub-prime mortgage market, and the global food price crisis. The causes of the latter are still being debated but the sudden – and largely unforeseen – spike in world food commodity prices early in 2008 has had profound consequences. Not least has been the subsequent massive agricultural investment by certain countries – notably Saudi Arabia, other land-poor, oil-rich states and the People’s Republic of China – in agri land and production in poor and developing countries, especially in Africa. The justification is ‘food security’ – the accusation is of ‘land-grabbing’.
But undoubtedly the 2008 food price crisis also brought a renewed focus on agricultural investment – and farmland in particular. Especially so given the hammering of financial investments as the financial crisis went viral, ensnaring sovereign debt en route. Much of the capital withdrawn from bonds and derivatives has found its way into gold but for many investors gold – even with, and perhaps because of, its spectacular gains since the financial crisis began - is and will always be an investment of last resort, a commodity largely devoid of underlying sentiment, whose value can plummet as quickly as it ascends. Today, a significant body of investors are revisiting the merits of investing in agriculture and farmland, because of the fundamental – and eternal - human needs they represent.
This article takes an initial look at agricultural investments, particularly farmland. The perspective taken is of the private investor with something in the range of, say, £10,000 to £100,000 at their disposal, to invest in agriculture. These are funds which are presumed to be – indeed, must be – liquid and discretionary, surplus to any fiscal obligations the investor may have. For investing in agriculture, particularly through farmland, is not an option for someone needing to finance the investment from other assets and/or needing a quick exit in the event that the funds are required elsewhere. We will also take a look at options an investor might take to invest in agriculture which do provide liquidity.
The Broad Categories
An agricultiral investment could take one of three basic forms – investment in farmland, investment in farming, and investment in upstream or downstream activity, meaning supply of inputs to a farming operation (upstream) or the (downstream) processing of farming outputs.
As indicated, the focus of this commentary is on investment in agricultural land. But unless the land is to be acquired simply for holding, without either an existing or newly-installed farming operation, an investment in farmland requires careful consideration of the bigger picture. The availability of inputs (such as machinery, fertiliser and – critically – water), the competence of the farming operation and the viability of the downstream processing of the farming outputs will all fundamentally impact on the investment quality of the land purchase.
Investing in Agriculture via ‘Land-banking’
One approach to investing in agriculture through farmland is to seek out and purchase agricultural land without regard to any current or future farming operation, and attendant revenues, and simply for the purpose of holding – ie, ‘banking’ - that land for an indeterminate period of time. The underlying rationale here is, to echo Mark Twain, that ‘they’re not making it any more’. The belief is that, at whatever price the land is purchased, it will – sooner or later – be worth more. There may be a specific factor in play, for example, the prospect of public funds to kick-start or support farming operations in that region, or the land may have been identified as lending itself to a change of use down the track. Typically this will be some form of commercial development or the use of the land for alternative energy generation (wind or solar in particular).
The expression ‘land-banking’ has had some bad press in recent years, especially though not exclusively in the United Kingdom, because of the ‘cowboy’ element attracted to this form of investment. Typical is an item in The Telegraph of 21 March this year, headlined ‘Land Bank Ordered to Pay £33 Million’ and reporting on a court order against a ‘land-bank’ – by then defunct, its founder having flown the coop – which had duped gullible investors into buying plots in the UK on the back of baseless claims that pending permission to develop the land would see its value soar. The Telegraph’s item started with this seeming definition of ‘land-bank’ –
“Land banks sell plots to investors on the basis that their value will rise when planning permission is granted. In reality, those behind the scheme have no intention of applying for permission and the land is normally unsuitable for development.”
Well, that lack of bona fides is undoubtedly the case with land-banks run by crooks and shysters. It doesn’t follow that land-banking schemes per se are inherently deceitful. And for those with the financial wherewithal, the patience to stay the distance and the acumen to go it alone or, if via an agency, to sort the cowboys from the genuine article, the accumulation of unused farmland for holding until a rise in value has occurred is a legitimate investment focus. Indeed massive fortunes have famously been built on exactly this form of investment.
Agricultiral Investments in Farmed Land
What a land-banking agricultural investment will not provide though is an income stream. If revenue from an investment in farmland is desired or needed – as opposed or in addition to a capital gain at some future point - that land must support either an existing or greenfield farming operation. Some salient observations should be made here – - The purchase price of already-farmed land will be many times higher than that of vacant land typically accumulated in a land-banking scheme. If agricultural land is vacant, there is bound to be a reason and that reason is bound to be depressing the market value of the land or perhaps suppressing any market at all for the land. Whereas an existing farming operation will inflate the value of the land, both because of the income generated and inherently.
The establishment of a greenfield farming operation (perhaps on newly irrigated land or where necessary infrastructure such as roads have been built) involves the risk of capital outlay in the belief that the subsequent value of the land will be worth more than the base price + the development capital. The price of the newly established greenfield agricultural land, given an active market, should reflect both the sunk costs and the future earnings of the farming enterprise. This is one way to make a strong return on an agricultural investment in a relatively short period of time but involves the additional risk of subsequently finding a buyer, or tenant, willing or able to provide the return on investment expected to justify the development costs incurred.
In either case, it will be critical to ensure both the fundamentals of the farming operation and the competence of any subsequent farm management. The first aspect should be a given – as with any investment, the numbers have to stack up. But even then, many an investment in farmed land has foundered because of incompetent management of the operational side. Not to belabour this latter point, an investor in farmland which is already being farmed, or is to be farmed under the investment proposal, is an investor and not a farmer. They should ensure the management will be executed by trained, experienced professionals – and of course be willing to pay for it.
For investors with £10,000 to £100,000 in liquid, discretionary funds, going it alone is unlikely to be an option when considering the option to invest in agriculture, via either actively-farmed land or in land on which a greenfield farming operation is to be established. This will certainly be the case with UK farmland, for example. The purchase price of even a modest arable farm – say, 100 acres or thereabouts – will easily exceed one million pounds for an ‘entry-level’ property without residential dwelling or other major improvements.
The option for smaller investors to invest in agricultire is to pool their resources. This could be by way of an existing investment scheme or fund or by the formation of a new syndicate or other pooling arrangement. In later instalments in this series, we will take a closer look at these various methods of entry into agricultural investment.
Home or Away?
In principle, our profiled investor might choose either to invest in farmland at home or to invest in some other part of the world. It so happens that farmland values in the United Kingdom are near the highest in the world. The Knight Frank International Farmland Index, published in its 2012 Wealth Report, put the 2011 average value of English farmland of all types at $22,000 per hectare (say, £5,600 per acre), second only behind prime New Zealand dairying land at $23,000. Moreover, for an outlay of one pound sterling in British farmland investment in 2000, the equivalent interest would need three pounds today. So an investment in farmland in the UK obviously means less bang for your buck, in terms of real estate acquired in a farmland purchase.
Investors seeking to make their investment capital go further are thus more likely to look elsewhere for suitable agricultural investments in farmland. As an example, prime arable land in southern England changes hands these days in a range of £6,000 to £7,000 per acre, with asking prices of up to £12,000 in especially desirable locales. Compare Bulgaria where, in January this year, land-banking company Advance Terra (listed on the Bulgarian stock exchange) reported the acquisition of 2,000 hectares of farmland in 2011 at an average price of 4,650 Bulgarian leva per hectare – around £790 per acre.
Bulgaria is of course just one example but it’s notable as having probably the cheapest farmland in the European Union. Indeed, the fact that this south-east European country is – along with neighbouring Romania – now in the EU, with the currency pegged to the Euro, will be an influential factor for many farmland investors seeking to buy more land for their sterling. A major consideration with any offshore farmland investment must be the security of that investment going forward, meaning especially security of the ownership interest and confidence in the ability and willingness of the local administrative and judicial regimes to protect that interest. From an investment viewpoint, the purchase of land in, say, Bulgaria or Romania, and therefore in the European Union, brings into play an adherence to specific rules – and the rule of law generally - which could be doubted in any given country in Africa, Asia or Latin America.
Nevertheless, there are numerous potential locations around the world for farmland investment, from the least developed parts of the world to the most, from lush plantation land in equatorial Africa, to the fertile black soils along the Romanian and Bulgarian sides of the Danube, to cool, high-country pastures in the South Island of New Zealand. The pros and cons of a selection of locales will be explored in later articles in this series on agricultural investments.
Mark Twain – he who advised buying land because they’re not making it any more – lost the wealth he’d accrued from his writing in a failed investment, having sunk millions of dollars in present-day value into the development of a typesetting machine rendered obsolete by the Linotype. He may have done better to heed his own tongue-in-cheek advice. But anyone exploring the option to invest in agriculture through farmland needs to proceed on the crystal clear understanding that they’re embarking on a long-term investment project, involving a product which may not, and in all probability won’t, be quickly liquidated should the need for cash arise. With that understood, farmland presents as an attractive choice for private investors as much as for multinational corporations and billion-dollar private equity and sovereign funds, albeit on a much smaller scale.
In later instalments in this series, we’ll take a closer look at specific aspects of farmland investment – location as mentioned above, but also factors favouring land-banking, the best types of farming on which to focus, the types of investment vehicle available to private investors – such as syndication, funds, stocks and the critical boxes to be ticked in any farmland investment choice, not least being water, whatever the rationale for the investment. Indeed, we’ll factor in the wider and growing implications of climate change in relation to agricultural investment. Stay tuned.