Investors have long looked to farmland for diversification, income, and long-term appreciation. Largely reserved for institutional players, and highly concentrated in the US, farmland investments have typically displayed strong, double-digit annualized returns. But now, as developed market agriculture investments become crowded, the income and appreciation potential of this asset class is being called into question.
Why are US farmland investments beginning to look less attractive? There are many factors. Higher operational costs have a tendency to thin margins, especially in the row crop sector. Largely dominated by low-value crops like corn, wheat, and soy, US farmland is facing increased competition from emerging economies who are just now beginning to leverage economies of scale to compete with US grains.
US farmland has traditionally shown strength. But that may be changing.
The fundamentals of farmland investments are still strong – but the developed world might not be the right target. Bolstered by improved market access, growing infrastructure, and widening investment channels, many emerging markets are poised to undergo the same farmland boom experienced by the US in past decades. The globalization of industrial agriculture will create a world of opportunities for agriculture investment in emerging markets.
In the early to mid 2000’s, US farmland was on a tear. Posting average annual returns of well over 10%, and soaring to over 30% in 2005, US farmland was a prized asset class. Spurred by growing demand from China, low interest rates, and a growing biofuels market, the highest returns were seen in Corn Belt states like Iowa, Nebraska, and the Dakotas.
Average Annual Returns for US Farmland
But some in government and the private sector have warned of a bubble. US farmland is notoriously cyclical, with booms and busts playing out every 30 years or so over the past century. The previous bust, which occurred in the 1980’s, was in part due to the over-leveraging of farm assets caused by low interest rates. Although debt-to-asset ratios remained prudent in the 2000’s, the COVID-inspired interest rate cuts could lead to overleveraged farmland in the future.
The US agriculture investment landscape is now crowded and premiums for high-yield farmland have skyrocketed to over $4000 per acre on average. This price point increases markedly with proximity to distribution channels, total land area purchased, and other crucial factors. Nowhere is this fact more apparent than the US Corn Belt, where the average price per acre has been pushed upwards of $6000 per acre on average.
These high prices leave little potential for appreciation, which is one of the key attractions of farmland as an asset class. Average US farmland values increased a meager 0.2% from 2018 to 2019, and with prices at a ceiling, it is unclear when these values will see any significant increase. With institutional investors such as hedge funds, pension funds, REITs, and private equity groups crowding the space, there seems to be little room for new participants, limiting valuational increases.
Shifting trade dynamics have also limited farmland income, especially for the ubiquitous row crops of the aptly-named Corn Belt. Agriculture intelligence firm AgIS predicted a “long slog ahead,” for US farmland income in the row crop sector, anticipating less than 8% annual yield for the foreseeable future. This decline is largely driven by the oversaturation of fuel crops in international markets.
For example, corn and soybean production from Brazil has respectively tripled and quadrupled in the past decade, eating up US market share. US corn production has dropped from 44% to 31% of the world total, and soybean has experienced a similar trend. As emerging market producers become more competitive, US farmland will lose some of its value.
Brazil’s soybean and corn production is now scaled to compete with the US
With appreciation and income declining in US farmland, investors seeking the many benefits of farmland assets may be wise to look elsewhere. With rising incomes in emerging markets and an ever-growing global population, the economic fundamentals behind farmland investment are rock-solid. But where to look?
Latin America presents a golden opportunity to diversify one’s agriculture portfolio. Despite overcrowding in developed markets, less than 1% of all farmland value globally interfaces with any form of institutional investment. The latent opportunity for agricultural FDI is highlighted by the fact that over 50,000 hectares in Latin America are actively seeking funding, totaling an amount of over $500 million.
Amount of unused potential farmland by country
Of course, Latin America is not a homogenous region, and even within this geography there are important factors to consider. In Brazil, for example, large-scale deforestation and a focus on fuel crops have made the agriculture sector highly unstable. With the recent oil glut, biofuels are not in a good position, and investors are suffering.
From an income perspective, low-margin crops such as soy and corn should be avoided in any part of the world. Tropical fruits, however, are seeing demand levels outpace many other agricultural goods, and are ideally suited to the tropical climates of the equatorial regions of South America. Mango, coconut, avocado, and lime have all seen steady growth rates, with coconut projected to achieve a CAGR of 9.5% until 2025.
Demand for coconut is growing in the US and elsewhere
In terms of appreciation, land quality and accessibility are major factors. Not only is Latin America home to some of the richest soils in the world, but the region possesses almost a quarter of the world’s potential cropland. The latent value of this highly fertile yet fallow land is hard to overstate. Latin America’s current agricultural exports are valued at around a quarter of a trillion dollars per year despite a meager 12% cultivation rate.
Colombia, for example, is currently using only 35% of its agricultural land, largely due to accessibility issues. But all that is changing. Herculean infrastructure projects such as Colombia’s Via Pacifico project are making large swaths of farmland reachable, which will constitute a major value driver for farmland in the country.
This latent potential has not gone unnoticed by institutional investors. “It’s one of the few regions of the world that still has underdeveloped and underutilized farmland. The region is home to nearly 30 percent of the globe’s arable land and one third of its freshwater supply, speaking to its sustainability over time,” said Mike Desa of AGD Consulting, a US based investment firm.
With the growth of US farmland values grinding to a halt and potential for income limited by an oversupply, the right opportunities in farmland investment may lie outside of the United States. A higher demand for specialty goods like tropical fruits, together with infrastructure and market access improvements, have set the stage for a potential farmland boom in Colombia and other emerging markets.