Throughout history land has been the most basic repository of wealth and value through good times and bad. Many investors are now taking an interest in farmland because it offers particularly appealing portfolio diversification characteristics under current market conditions. Furthermore, supply and demand fundamentals could make farmland even more attractive over the next few decades than historical performance implies.
An investment in farmland is backed by a rock solid asset in finite supply which is unlikely to depreciate in value. Historically, data shows that farmland has exhibited strong capital protection characteristics over prolonged periods of time.
Owning farmland has advantages, one being that income earned from and gains made from selling the land are exempt from taxation. Buying agricultural land can be a good investment for high net worth individuals and for those with surplus income.
Farmland also provides a regular income to the investor, making it a useful replacement for lost ‘risk free’ income on cash deposits and bonds due to low interest rates. Farmland investment captures both operating and capital returns through a combination of rental income and appreciation in the value of the asset.
Studies have repeatedly demonstrated that farmland delivers higher risk adjusted returns than mainstream asset classes. In other words, farmland rewards investors with a higher level of excess return (‘risk premium’) per unit of risk.
Farming is like any other business: all other things being equal, income is dictated by the quality of the management team. Even enterprises with similar soil, climate and business model can show a high degree of variance. In order to optimize returns for our clients we thoroughly assess the background and historical performance of tenant farmers and operational managers against regional and sector based benchmarks. This will include an assessment of yield performance, soil management track record and other indicators of agricultural management capability.
And on the other hand, food demand is highly price inelastic: irrespective of economic conditions, people still need to eat. Food prices are also one of the areas of where the growing wealth of emerging market consumers is most directly captured. As a general rule, agricultural land values are supported by the earnings derived from the asset itself. Debt-to-asset ratios remain low in the farming sector compared to other real estate asset classes. In many of parts of the world, including a number of developed economies, there is a range of tax incentives associated specifically with farm real estate. This may include one or all of the standard taxes (income, capital and inheritance tax). This can further enhance net returns on farmland as compared to other asset classes.