Over the last decade, investors worldwide have been turning to agriculture as a sector that can produce above average yields. This trend 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 is becoming more popular and financial managers more familiar with it, a greater number of individuals is seeking to invest. This article explores the recent trends observed by major actors in the agriculture industry.
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 Delaware or Caribbean havens.
North America is still the predominant destination for agricultural ventures, particularly the Midwestern and Western United States. The most attractive features of these regions are the political stability and the predictable tax regime; the same is true of the eastern members of the European Union as well as Australia and New Zealand. 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 and Africa. Therefore, 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, Argentina, and Brazil 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 example, during the first two years of Prime Minister Modi’s government, India has seen an increase of more than 50% in Foreign Direct Investment. This increase is due mainly to legislative reform aimed towards reassuring investors. Similarly, it is estimated that more than 50 agricultural funds based in western countries are currently operating in sub-Saharan Africa. Though still risky, the emerging markets of Africa and Asia will soon become as coveted as to western 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 as a way to protect the investor against region-specific climate variations and natural disasters. Likewise, the farmland should have several water sources such as natural springs, underground aquifers, rain, and irrigation infrastructure.
A final element taken into consideration by fund managers is the demand for the agricultural products being cultivated. In this regard a new market sector is opening up, research suggests that crops destined for biofuel will take up anywhere between 5% and 10% of all arable land worldwide within the next decade. This expanding demand has led investors to focus regionally on the most energy productive crops; these include corn and soybeans in North America, sugarcane and soybeans in South America, and palm oil and sugarcane in West Africa. In conclusion, market assessments, geographic location, and management strategies are all factors to be taken into consideration in order to maximize the productivity of agricultural investments.