After Decades of Agricultural Expansion, Has the World Passed Peak Agricultural Land?

How can investors prepare for what comes next?

©Hirurg via Canva.com

Humans have been reshaping the Earth for thousands of years by repurposing the planet's wildlands and forests to grow crops and establish agriculture.

It's estimated that since the end of the last ice age, about one-third of the Earth's forests and two-thirds of the prairies have been converted. Some of that was to make space for housing and other settlements, but much was reallocated to create land dedicated to food production. 

However, in recent decades global agricultural land use has started to fall. Although it's not clear that the global amount of arable land will continue to shrink, U.S. agricultural land use will likely continue to decline.

What would peak agricultural land mean for America and its farmland investors? Exactly how much land is necessary to feed the planet's population? How will global land use change in the coming decades? And how can an investor use this information to their advantage?

What is Peak Agricultural Land?

Peak farmland is the point at which the amount of farmland begins to decline due to soil degradation, yield improvements, or simply shifting land use. 

The term refers to the belief that, at least in the U.S., the maximum has been reached. And that the amount of reported agricultural land will only decline from here.

Once global croplands reach their peaks, farmers will have to produce more food on less land, driving higher yields and increasing food prices. 

Without continuous yield improvements or a stronger shift to vertical farming, there is some concern about the impacts passing peak agricultural land could have on the global food supply. 

The Causes of Declining Arable Land

Land use patterns are changing regardless of the real risk level to food security. 

In recent years, more and more agricultural land has been degraded or converted to other uses, such as housing developments or commercial properties. As a result, the amount of farmland in the U.S. is declining. 

Laws of supply and demand mean a decrease in reported agricultural land use likely will drive a natural increase in farmland values. As an investor, not only will you be able to reap the rewards of appreciation, but you'll also be investing in a vital part of the globe's infrastructure.

First, it's essential to understand why agricultural land use is decreasing.

Increasing urbanization and soaring land prices

According to the Food and Agriculture Organization (FAO), between 2021 and 2022, farmland prices in the U.S. increased an average of 12.4 percent to $3,800 per acre.

There's a multitude of reasons driving this perfect storm of exploding farmland values. Between near-zero interest rates in previous years, a robust housing market, an abundance of subsidies, and high prices for cash crops and commodities like corn, soybeans, and wheat, farmland is an attractive investment. 

However, smaller-scale farmers are being pushed out by private equity firms, real estate developers, and wealthy individuals. Although farmland continues to exist in the U.S., it’s less and less accessible to the average investor.

For example, the housing market of the past few years has added upward pressure to farmland prices because it’s not only farmers competing with farmers for the farmland. Developers have also been looking for tracts neighboring growing urban areas that can be converted from farmland into residential housing.

It's no wonder farmland values are growing so rapidly. Farmland’s track record as a stable, inflation-resistant, market-beating investment continues to make it an enticing opportunity for large and small investors.

High-tech farming methods

Another central factor lies in reducing land pressures through our improving ability to grow crops and raise livestock efficiently. Densely planted crops, modern fertilizers, and upgraded seeds allow the modern farmer to do more with less. 

Higher returns per acre mean expanding agriculture production without increasing agricultural land footprints.

Although improved yields are good, they can come with increased costs and risks. The high-tech seeds, matched fertilizers, and specialty equipment necessary for achieving high productivity can be prohibitively expensive.

Further, supply chain breakdowns in such an optimized system can have serious consequences. Most fertilizers, or example, are made from natural gas. Fertilizer costs could skyrocket if the U.S. continues diverting large quantities of natural gas to Europe to help bridge the gap created by the Ukraine war. 

Declining arable land means less room for sub-optimal yields, causing the advantages of increased farming efficiency to quickly become challenges.

Droughts and other disasters

Unfortunately, not all agricultural land reductions come from generally positive factors. 

Although land yields are far better than they were a century ago, we may have hit a plateau. Global yields have been relatively stable over the past several years due partly to weather pattern changes. In many areas, higher temperatures negatively impact production, leading to heatflation-induced higher prices.

California, for example, faces extreme challenges from drought, pollution, and labor shortages. Despite producing a significant portion of the U.S.'s food, these factors make the Golden State's agricultural future increasingly uncertain.

Why Does Peak Agricultural Land Matter?

Land is a valuable commodity in the United States. According to the USDA, there are roughly 911 million acres of land in the contiguous 48 states. About one-third of that is used to raise livestock or grow crops. 

Of that agricultural land, about 60 percent is used as grazing land for livestock, while the rest is used for cropland. 

Why does it matter if the world has passed peak agricultural land? Who is affected, and what are the impacts?

Growing global population

It's no secret that the world's population is growing. We recently surpassed 8 billion people, and according to the United Nations, the population is projected to reach 9.8 billion by 2050. 

As our numbers grow, so does the demand for food. But if we've surpassed peak agricultural land, meeting this demand requires farmers to squeeze more food from less land. A decline in agricultural land use forces increased yields or shifts to other areas of the planet's land. 

For the U.S., that could mean turning to nearby neighbors in South and Central America. Colombia, for example, can grow crops year-round with its abundant rainfall and ample equatorial sunlight.

Inflation of food prices 

According to the most recent census data, food production levels have remained relatively stable over the past two years. 

However, this has not been enough to keep up with the rising demand from a growing population. Year-over-year food price inflation of around 12 percent has been some of the highest on record in the U.S.

As a result, food prices have reached record highs, with the average family spending more on food than ever before. 

Inflation has created a challenging economic environment for families across the country. Some families can offset these costs by growing their own crops, but many households have been forced to cut back on other expenses to afford basic necessities. 

Agricultural productivity and crop yields are plateauing

Agricultural productivity refers to the rate at which crops can yield results. In other words, it measures how much land is needed to produce a given amount of food. 

For centuries, yields have been increasing due to technological advances and selective crop breeding. 

However, there are signs that this trend may be coming to an end. Agricultural yields have stagnated recently, even as agricultural land use has increased, and we may be reaching the limits of what current technology can do to help us offset the impact of peak agricultural land. 

Where to Turn if North American Agricultural Land has Peaked?

Through most of 2022, the U.S. is still a net exporter of food, but the USDA expects that to change. Canada and Mexico are the country's most significant trading partners, but there's a lot of room for the other partners to grow. 

China is hoarding grain and the conflict in Ukraine paints a bleak global picture

The trade disputes between the U.S. and China, coupled with the war in Ukraine, changed the dynamics of global food production. In 2020, China was the fifth largest source of U.S. food imports outside of North America, but since Russia's invasion of Ukraine, the nation has been accused of hoarding grains. 

The war in Ukraine also impedes grain exports from the "world's breadbasket," causing global food prices and food insecurity to increase dramatically. 

Both situations mean America can no longer rely on food exports from just anywhere. Strategically, they must come from closer to home. 

The global trend of de-globalization and nearshoring

Even before the Ukraine war, after decades of increased globalization, the tide had started to turn. 

In recent years, there has been a growing trend toward nearshoring. As companies have become more aware of the risks and challenges associated with globalization, they have increasingly chosen to nearshore their operations. 

Nearshoring involves moving production or other business activities closer to home to reduce costs, improve security, and increase efficiency. The trend applies to manufacturing, services, and agriculture. 

The future will likely see more and more food production for the U.S. coming from temperate regions of Central and South America.

©Pgiam via Canva.com

The Future of Farmland Is in Nearby Tropical Regions

If the U.S. has already passed peak agricultural land, the future of farmland investments will likely be elsewhere. Places like Colombia are poised to grow in the wake of the same trend in the northern hemisphere.

The growing need for agricultural land in the Southern Hemisphere

The planet's land is an important aspect of global investments. Much of the world's farmland is in the Northern Hemisphere, where most of the world's crops are grown. 

However, with the planet's population projected to exceed 9.5 billion by 2050, and climate change making it more difficult to grow crops in many parts of the world, there is a growing need for farmland in the Southern Hemisphere, particularly in many tropical countries.

It's likely that part of the world has passed peak agricultural land after centuries of expansion. On the other hand, other regions will benefit from the same trend, and our use of the planet's land will continue to change.

Although historically not a significant portion of global arable land, countries on and near the equator benefit from multiple growing cycles per year. 

As a result, Colombia is especially poised to grow in the wake of peak farmland in the Northern Hemisphere. Various factors make it attractive, including its large tracts of land, diverse climate zones, and political stability. 

How Colombia stands to benefit from peak agricultural land

Many countries in South and Central America possess abundant natural resources. Colombia, driven by its new president Gustavo Petro, is experiencing a shift toward the agricultural component of its economy. 

The nation has already made significant strides in improving its agricultural infrastructure, making it an increasingly attractive destination for farmland investors.

Through environmental concerns and in anticipation of peak oil, there's a drive to shift the country's economy away from extractive industries and toward sustainable agricultural production. National and international investment, along with substantial loans from the World Bank, will help the sector grow by nearly 600 percent over the next few decades. 

How can investors position themselves for the era after peak farmland in the U.S.?

Agriculture remains an attractive addition to a diversified investment portfolio, even as peak farmland in the U.S. shifts opportunities elsewhere.

Although technological advances make it possible to feed more people from less land, a growing global population and plateauing yields mean some of the U.S.’s disappearing farmland will need to be replaced. 

For U.S.-based investors interested in farmland, Latin and South American countries are prime candidates for agricultural growth due to their climates and proximity. Areas with solid trading relationships around the globe and a willingness to invest in agricultural infrastructure will likely see increases in food production and agricultural investment in the coming decades.

Should you consider investing in farmland in South America?

Latin American, and in particular Colombia, offers many of the aspects essential for a great farmland investment.

Plentiful natural resources, attractive climates, a stable investment environment, and numerous free trade agreements make an investment in Colombian farmland especially intriguing. Further, a government leader dedicated to creating a sustainable agriculture powerhouse could lead to massive potential for growth in this low-risk, high-reward sector.

If the opportunity to invest in Colombian farmland has piqued your interest and you'd like to learn more about investing in Colombia, use the contact form below to get in touch with the team at Farmfolio.

Contact Us