Emerging Markets / May 22, 2018

Capitalizing on Sound Agricultural Ventures

Throughout the last decade, investors worldwide have been turning to agriculture as a sector that can produce above average yields. This trend of investment into agribusiness covers the whole financial spectrum from REITs and stocks to private equity and investment funds. Traditionally, the main group of investors in agribusiness has included pension funds, university endowments, and high net worth individuals looking for substantial returns. However, as the agriculture sector becomes more popular and financial managers become more familiar with it, a greater number of individuals is seeking to invest in the sector.

Capitalizing on Sound Agricultural Ventures

Today, the food and agriculture category offers higher yields than average bond and equity investments. However, financial institutions are managing these investments in several different ways. Adhering to conservative strategies, some investors prefer to lease out their farmland property; thus, protecting themselves from variations in crops yields and climate risks. On the other hand, some managers actively run the properties themselves and consequently expose themselves to greater potential risk as well as reward. Similarly, funds and investors in the agriculture business tend to follow a similar model for legal incorporation. Most of these entities create Limited Liability Corporations in legally stable and financially favorable jurisdictions such as Luxembourg or the Cayman Islands.

It is irrefutable that North America is still the predominant destination for agricultural ventures, particularly the Midwest and the western United States. The most attractive features of these regions are the political stability and the predictable tax regime, which is also true of the eastern members of the European Union as well as Australia and New Zealand. Therefore, all of the above-mentioned jurisdictions have witnessed substantial agricultural developments. However, the land in these regions is limited and the climate is not as productive as that of Latin America, South Asia, and parts of Africa. Thus, investors face a trade-off between economic and political stability alongside easier access to biotechnology or lower operational costs and yearlong crop yields.

Amongst the emerging regions of Latin America, Africa and Asia, countries like Colombia, Panama, and Argentina have traditionally been the safest and preferred destinations. However, as business-friendly governments work towards political stability and tax predictability, new regions are becoming very attractive. For instance, in recent years, India has seen a substantial increase of more than 50% in the amount of Foreign Direct Investment (FDI) entering the country. This increase is due mainly to legislative reform aimed towards reassuring investors. Likewise, it is estimated that more than 50 agricultural funds based in western countries are currently operating in sub-Saharan Africa. Though still riskier, the emerging markets of Africa and Asia will eventually become as coveted for international investors as Latin America.

Some other considerations taken into account when settling on farmland investments are weather and water resources. A diversified agricultural portfolio will incorporate several geographic regions and crops as a way to protect the investor against regional climate variations and natural disasters. Likewise, the farmland should have several water sources such as natural springs, underground aquifers, rain, reservoirs, and irrigation infrastructure.

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