Investors look to agriculture for many reasons – diversification, real assets, non-correlation, cash yields. But agriculture is not a homogeneous category, and to successfully access the space, investors need to understand which agriculture assets suit their needs.
Crops can be grouped into two major categories – row crops and permanent crops. Row crops, such as corn, soy, and wheat, must be planted, harvested, and replanted again every season. Permanent crops like avocado, mango, and coconut stay productive for many seasons, but require a longer development period to reach maturity.
In the right circumstances, both of these types can be hugely successful. But the return profiles can be much different. Investors need a clear idea of their goals in order to diversify between these categories and optimize their returns over their preferred time horizon.
While row crops are relatively well-known, permanent crops have only recently emerged as viable agricultural investments in the minds of investors, especially from an institutional perspective. Looking for higher income, lower operational costs, and long-term appreciation, institutional players like TIAA-CREF, which owns $4.5 billion in farmland assets, have allocated to permanent crops such as avocado, wine grapes, and apples.
Generally manifesting as trees or vines, permanent crops are managed with long-term future revenue in mind. Diversifying an agricultural investment with permanent crops presents an excellent hedging opportunity for an agricultural venture. As their names suggest, row crops are generally planted annually in rows to maximize the planted land area. Permanent crops do not rotate and stay in place for many years, sometimes decades, and offer annual yields from the same plant.
Permanent crops are a bit riskier than row crops due to their longer maturation times, but their annual returns tend to exceed that of row crops. Data from the National Council of Real Estate Investment Fiduciaries (NCREIF) shows that annualized income in permanent crop farmland investments rose from 13.06 percent to 18.28 percent from 2004 to 2014. Row crops, n the other hand, are expected to stay below 8% returns for the coming decades, notes investment firm AgIS. Their annual market report foretold “a long slog ahead,” for row crops.
Annual Returns of Certain Permanent Crops
The ability to further diversify with permanent crops is a unique feature of agricultural investments. While many individuals are familiar with row crops, permanent crops have generally avoided the spotlight. This trend is beginning to reverse, however, thanks to a confluence of health-conscious consumers, a growing middle-class, and an increasing desire for alternative investments. As such, permanent crops are entering the limelight as highly sought-after investment vehicles.
Demand Is Outpacing Supply
For many permanent crop categories, demand has seen significant gains. Almond prices have increased 48.5% between 2007 and 2012, while demand for avocados has seen prices steadily rise by 13.9% per year. This booming demand demonstrates how a growing middle class’ increasing preference for healthy foods in positively impacting permanent crop premiums.
The growing global middle class is at the intersection of the increasing demand for healthy food and the general uptrend in a diversified diet. As more of the world’s population achieve income levels that enable them to indulge in tropical fruits, nuts, and other permanent crops, the demand for these goods will only grow.
With the middle class projected to expand by a staggering 53% between 2020 and 2030, adding 1.7 billion people to its ranks, now is the perfect time for investors in agriculture to consider diversifying with permanent crops.
US Fruits and Vegetables Market Growth
Ideal Permanent Crops
Permanent crops can be distilled into three broad categories: fruits, nuts, and tree beans.
Fruits such as avocado have experienced unprecedented booms in recent years, with market growth posting double-digit rates for many years. Indeed, the global avocado market grow 104% from 2000 to 2016.
Global demand for tropical fruits continues to increase, with global papaya production increasing by 35% between 2002 and 2010. With Latin American nations accounting for over 70% of the world’s output of avocados, papayas, and mangoes, the region is well-positioned to take advantage of the continued demand for these products.
Seeds and nuts are additional examples of thriving permanent crops. With a compound annual growth rate of 13.6%, coconuts are in high demand for their dietary and skin-friendly oils. Nuts, in general, have experienced an intense increase in demand over the last decade thanks to the rise of plant-based food alternatives. With a global market value of almost $60 billion annually, this trend is likely to continue.
While preferences for healthy foods are increasing markedly in the developed world, the emerging global middle class is taking advantage of well-loved and familiar treats. Tree beans comprise a large share of these staples such as cocoa and coffee, products for which Latin America is famed. Cocoa will likely boast a compound annual growth rate of 7.3% between 2019 and 2025, according to estimates, while Brazil and Colombia produce over 28% of the world’s coffee between them.
Long-Term Income Generating Assets
As the world’s middle class continues to grow, the demand for tropical fruits, nuts, and tree beans will grow with it. The rising trend of consumers seeking out healthy foods means that permanent crops will reap the rewards of changing preferences.
Permanent crops play a key role in a well-diversified agriculture portfolio. With their longer time horizons, promising cash yields, and lower operational costs, permanent crop farmland investments are quickly attracting private and institutional investors looking for real, alternative assets.