It’s no surprise that in a world racing past seven billion people, farmland and food crops have drawn attention as an investment theme.
According to a research paper from Absolute Return Partners titled The Protein Bomb, in 2011 farmland prices in the U.S. midwest increased by 22% on average. With much of the world — especially the emerging middle class in developing nations — shifting to a higher protein diet, increased need for grain to feed chicken, beef and pork requires increased crop output. When demand rises, farmland prices follow.
As the paper indicates, “Arable land is a finite resource and so is water. Demand on existing resources will be immense over the next few decades as living standards increase around the world.”
The paper goes on to evaluate why, when such a clear trend is developing, so few people have exposure to agriculture in their investment portfolios. Many institutional investors (pension funds, foundations, etc.) do allocate funds in this area but very few individual investors do. Part of the problem is the cyclical nature of agriculture commodities and the complexity of trading futures contracts based on assumed crop and livestock trends.
“However,” the paper continues. “if you can stomach the cyclical nature of this asset class, I find it hard to envisage an environment where the returns do not comfortably outpace returns on bonds and equities when looked upon over the next 5-10 years.”
If commodities investments and futures contracts leave you hesitant to add exposure to this theme, it’s still possible to participate through traditional stock holdings. You can stick to investments in machinery or fertilizer manufacturers and capture movement of the general theme without having to pick the right crop at the right time.
The perceived benefit of the farmland and agriculture theme is that investment returns in this area are driven by factors other than company earnings or interest rates. It’s largely a matter of supply and demand. This should effectively cause these investments to move in different patterns than stocks or bonds. There may be stock-like fluctuation in returns from one period to the next but adding diverse return drivers to your portfolio is a proven way to reduce risk of the overall investment mix.
~ Brooks, Hughes & Jones, Partners in Wealth Management, Tacoma, WA
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