Farmland Investment

Farmland has emerged as an attractive investment alternative for fund sponsors and institutional investors in the prevailing scenario characterized by low returns on investment. Farmland investment facilitates diversification of portfolio and serves as inflation hedge. The risks involved in farmland investing makes it suitable for investors who are prepared to make long-term investments in farmland.

As the world economy struggles with food shortages and rising prices, farmland is becoming the new gold. Both food-poor and even developed nations are facing concerns of high food prices and food shortages. Top grain producers like India, Vietnam and Indonesia are reducing export quota of key crops like rice and wheat to ensure domestic supplies. These developments are also fueling food prices worldwide and raising concerns about potential shortages.

To feed billions of people, countries are racing to garner rights to surplus farmland in developing countries. There are two major reasons which encourage investments in farmland. One is the rising food crisis and the other is the potential of farmland as an alternative investment or as part of investment portfolio of investors, as they are competing to cash in on one of the few sound investments left in the aftermath of the global financial crisis. As a result, farmland is changing hands more than ever before and is the lone bright spot in the real estate sector.

In most countries, urban and suburban home values are decreasing while those of farmlands soaring. In the US, farmland is the strongest and reflects extraordinary profits as America’s energy policy encourages the production of ethanol from corn. Investors who never sat on a tractor are driving the farmland prices at record levels against assured returns.

On the other hand, farmland has been plowing profits to farmers which, in turn is helping them buy farm equipment and land. Earlier, mainstream investors had overtaken farmers as the largest buyers of farmland and now farmers are leading the front. Over the last two decades, consumer demand for food products has witnessed significant growth and diversification owing to economic reforms, rise in GDP, youthful demographics and rising incomes. Along with the growth in consumption of traditional food items, such as, cereals and pulses, other food categories, such as, vegetable oils, eggs, fruit, vegetables, milk and meats have also registered rapid growth. The private investment climate for agriculture in India has witnessed significant improvement with the elimination of plant-scale restrictions, eased regulations on storage of farm produce, better credit environment, reduced business taxes, simplified food laws.

There are many factors that drive investment in farmland. These include commodity market boom, stock market volatility, tax incentives and favorable interest rates and continued development of residential and commercial developments. More importantly, farmland investment acts as a nature hedge against inflation and is less volatile exposure than equities and commodities futures. It also acts as a recession proof and provides non-correlated source of returns. For property investors, it acts as a viable real asset alternative.

At the same time, increasing concerns of food crisis have led countries, which can afford to spend on overseas farms, to look for arable land to secure food supplies for the future. Sourcing food grains from other countries is increasingly risky in an era of rigid trade restrictions and predictions of escalating food prices. Policymakers in nations facing food shortage are laying the groundwork for a new approach – buying or renting farmland in countries with plenty of arable land.

The world economies led by the US thrust of biofuels are also pushing farmland investment despite concerns of allocating farmland to biofuels rather than food crops. There are concerns that increasing value of farmland may discourage farm investment and encourage speculation. According to some investors, land is the root of all commodities and is an interesting investment option. It is not only investors even wealthy farmers from the United States and Australia are planning to expand their farmland operations, beyond their homeland, particularly in South America. So, the factors behind increasing interests in farmland are not only food security and assured food supply, but also speculative investment.

N Janardhan Rao,  Senior Economist.