Article / August 11, 2020

Farmland Investment – ‘Gold With a Coupon’

The world economy is in a shaky state in 2020. Although certain indexes appear to be strong, uncertainty still lingers, and millions of investors are searching for a safe place to park assets where there are still ample returns. Holding cash isn’t looking too safe these days, and many are unsure of other alternative asset classes like cryptocurrency or even gold. But there’s an alternative that people rarely consider – farmland investment. 

“Gold with a coupon.”

Due to agriculture’s lack of correlation with publicly traded markets, it serves as a perfect asset for hedging against unexpected global macro uncertainty. Farmland investments have impressively low levels of volatility, making them a robust defensive investment. These benefits of holding farmland have earned it the moniker “gold with a coupon.”

Members of the developed world are already well-exposed to agricultural investments, whether or not they are aware of it. Over 44% of US households have exposure to Real Estate Investment Trusts (REITs) to some degree or another. These sophisticated instruments have successfully financialized farmland across various regions of the United States and beyond and are prevalent in numerous 401K plans.

However, dispite their ubiquity, US farmland investment is not the high-yielding, high-appreciation asset class it once weas. High costs have lowered yields in developed markets, and land prices, while high, have remained stagnant. From 2018 to 2019, US farmland on average appreciated less than 1%.

US farmland has appreciated strongly in recent decades. However, this trend has recently ground to a halt. The most attractive farmland opportunities lie elsewhere.

For this reason, farmland outside of the developed world can often be a more viable alternative. Many emerging markets possess cheap, fertile land that is rife with potential for agricultural investment, and there may be no better example of this trend than the nation of Colombia.

Agriculture in Colombia

Colombia hosts some of the world’s most fertile and diverse landscapes. Its status as a middle-income nation with massive agricultural potential makes Colombian farmland a viable, unique opportunity for agriculture real estate. With ideal access to Pacific and Atlantic ports, Colombia also features a wide range of topographical and climatic conditions. This makes the country a perfect origin for a wide variety of agricultural goods, especially high-value fruit, timber, and floral products. 

Colombia presents numerous benefits in terms of sustainability, agricultural investments, and investment productiveness. The relative affordability of Colombia is a huge factor in those benefits. Compared to the developed world, Colombia is the 2nd most affordable place to live in Latin America. This affordability is even more pronounced in rural areas. 

Colombia’s Cocora Valley. Vast diversity in terms of topography and climate make Colombia an ideal agricultural producer. 

This affordability means that investment in Colombia can go a long way in impacting rural farmers. Although there are many NGOs making material inroads in improving the wages and standard of living for these hardworking agricultural families, strong support from the private sector is needed to make a lasting impact on poorer regions.

The International Center for Tropical Agriculture sees massive investment potential in Colombia’s sustainable agriculture movement, highlighting the intersection of ESG and portfolio hedging opportunities. The increased interest in sustainability for Colombia is not a small detail. Considering over 40 million Americans care about sustainability, investing in agriculture is a way to impact farming practices directly.

Value-added agriculture presents a $20 billion opportunity in Colombia. The sector has experienced a roughly 38% increase over the last decade and is poised to continue flourishing. As infrastructure continues to improve, thanks largely to the massive Fourth Generation road project, value-added production will continue to create integrated supply chains.

Colombia is connecting the rural with the urban.

Massive infrastructure projects in Colombia will allow rural farmers much more fluid access to domestic and international markets. The 4G (Fourth Generation) infrastructure program has received over $6 billion in funding. It is on track to create over 40 highways to connect urban areas to coastal ports. These routes will consequently pass through rural agricultural areas, providing an tremendous boon for farmland.

The 4G infrastructure project will connect Colombia’s agricultural land with its coastal regions, creating huge value for the country’s ag sector.

For this reason and more, the agriculture sector in Colombia projects a compound annual growth rate of 7.3% between 2020 and 2025. The confluence between vastly improved infrastructure and foreign aid has already led to thousands of new jobs and sustained growth in the agricultural industry, which accounts for roughly 4.3% of GDP as of 2018.

The Rural Agricultural Planning Unit (UPRA), Colombia’s government policymaker for agriculture, found that 42% or 47.5 million hectares, can be traded on the rural land market. Agricultural land valuations were 28.6% that of urban land valuations in 2012 and rose to 34% by 2017. Comparable increases in rural land valuations show the lucrative opportunity of rural Colombian agriculture as a high-growth, non-correlated asset in an already high-growth middle-income country.

Colombia´s agriculture industry is poised for a major boom, and investors can gain exposure to this pheonomenon through direct farmland ownership. With rapidly expanding infrastructure, ideal climate and soil conditions, and readily available agriculture land, there has never been a better time to invest in Colombian agriculture.

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