Farmland investing: A bright future

The boom in food prices over the past 15 years and associated volatility in food prices has prompted relatively wealthy countries dependent on imports to renew their focus on policies to enhance food security. This has in turn prompted many of them to search for opportunities to secure food supply internationally. Coupled with a depressed yields in other assets such as equities and bonds, the food the boom has led to investors ‘rediscovering’ the agricultural sector, particularly in farmland acquisition in developing countries. While this could be seen as a unique opportunity to reverse long-standing underinvestment in agriculture in many regions, it could also lead to a general failure to provide broad social, environmental and economic benefits when governance is relatively weak and property rights are ill-defined and unenforced. Nevertheless, investment in farmland has acquired renewed interest from many quarters, particularly institutional investors and pension funds saddled with the management of liabilities over very long durations. But investors demand reliable access to performance metrics so that rates of return and downside risk on holdings in farmland and agricultural operations can be compared with alternative investments. Metrics that form a comparable basis necessarily include: return on farm gate commodities (price and volume) including cost savings from operational efficiencies and productivity improvements through farm management; and capital appreciation of farmland.