The case for buying farmland

Those who have got land are in a strong position: Hollywood director James Cameron understands it; the Chinese understand - our New Zealand government does not

The Coming 'Protein Bomb' And The Incredible Case For Buying Farmland

Business Insider, 

3 March, 2012

In the latest version of the Absolute Return Letter, investor Niels Jensen makes the case for buying farm land, an asset class you've heard a lot of people go bullish on over the last few years.

In Jensen's view, despite the big run in farmland in recent years, it's actually under-owned as an investment.

Question for you: Which distinctly British asset class has offered the most attractive returns over the past decade? Central London property? Not even close, even if it has done rather well. UK farmland is the answer, having more than tripled in value over a decade which will otherwise not be remembered for its outsized returns. The rise in farmland values is not only a British phenomenon. All over  Northern Europe and North America farmland values have responded well to higher commodity prices. Last year alone, farmland prices in the US Midwest appreciated by 22% on average (details here). 

Now, if ‘rental income’ on farmland is going up as measured by higher crop prices, it is only logical that the value of the land appreciates, similar to the dynamics in the commercial property sector. However, I have long been puzzled by the fact that you find virtually no exposure to farmland in institutional portfolios despite the supremely attractive yields on offer when compared to commercial property. Pension funds happily buy office buildings, earning a return of 4-5%, maybe 6%, yet few have ventured into farmland where yields can be as high as 10% if the farm is big enough and run professionally enough.

In addition to the numbers (the capital appreciation, the potential rental yield, and the fact that it's generally under-owned), Jensen argues that farmland is the prime bet for people looking to bet on the rise in the developing world getting richer, and the coming 'protein bomb', the phenomenon of people eating more meat as they move up through the socio-economic ranks.

The nut chart is this one, just showing the relationship between GDP/capita and animal protein consumption/capita.

Okay, that might seem kind of obvious, like much of what you've seen before, but maybe this chart will catch your eye a bit.

Even though China will remain, on a GDP/capita basis rather pool for awhile, on a pure numbers basis, it's going to blow by everyone rather soon in terms of building up a class of people with decent purchasing power.
 China

So who will be the winners from the inevitable Chinese meat-eating binge:

According to estimates from Morgan Stanley, a full 70% of China’s corn produce and about 14% of its wheat already goes towards feeding the livestock industry. As the Chinese stuff themselves with ever more meat, only the world’s largest grain exporters are big enough to deliver on the scale the Chinese will need. It will be countries such as Argentina, the United States, Russia and Australia that are likely to benefit from the Chinese protein feast.

Bottom line: When you factor in the fact that they're -- as the cliche goes -- not making any more land, the case looks even stronger.