The Next Wave Of Farmland Success

By now the secret is out about farmland. People don’t need to be reminded of previous examples of farmland success or why farmland is a good investment. They get it. Especially Farmfolio’s followers.

But no two farms are the same. There’s a world of variety: apples in South Africa, soybeans in Iowa, blueberries in Peru…it’s difficult to know where to get started.

The key is to understand the value drivers of farmland. What are the major factors that can be used to identify the crop types and geographical regions where farmland will be the most successful? Let’s take a look.

Location

At the end of the day, farmland is a real estate investment. Following that line of reasoning, location is as important as anything.

It may seem obvious, but choosing a location for farmland ownership is not as easy as it seems. Even within regions where farmland has risen greatly in value, appreciation has been largely concentrated within certain areas. And virtually without exception, those areas are the ones that are best connected to existing and/or developing infrastructure.

Infrastructure is something that people often take for granted in the developed world. Roads, bridges, highways…much of the critical infrastructure in the U.S. and Europe has been around for decades.

Not so in other places. In developing countries, the installation of new infrastructure can lead to dramatic surges in value. In places like Brazil, Chile, and Peru, increases in farmland value have been attributed largely to new infrastructure access.

Besides the obvious logistical efficiencies, the potential for population growth and, ultimately, the conversion of farmland into semi-rural, industrial, or residential usages can have a significant impact on its value. According to one study, “insertion of land in an industrial/commercial zone increases its value by 28% over agriculturally zoned land.”

As it happens, this bodes extremely well for Colombia, which is Farmfolio's acquisition target of choice. The country’s ongoing Fourth Generation infrastructure program is on track to install roughly 5,000 miles of new highways, tunnels, and bridges that will connect the country’s fertile, agriculture-focused interior with Atlantic and Pacific sea lanes. International powerhouses like Blackrock and JP Morgan have bet heavily on the project, indicating a broad interest in Colombia’s development on the part of institutional investors.

To summarize, one of the most critical - and often overlooked - value drivers for farmland is its proximity to developing infrastructure. Of course, this presence of infrastructure is more relevant to the appreciation side of farmland ownership. But what about the income?

Agronomic Factors

One way or another, the income stream of a farmland property is always going to be determined by its capacity for production. And although there are many factors that determine production capacity, the agronomic quality of the land itself is the basis of them all. Without quality land, no amount of savvy management or deft commercialization can make a farmland property successful.

So what is agronomic quality, exactly? Well, as you might imagine, it all starts with the soil.

Soil is a universe of study unto itself, and we won’t attempt to give a full explanation of it here. However, the scientific consensus identifies seven major factors that determine the quality of soil: nutrient availability, nutrient retention capacity, rooting conditions, oxygen availability to roots, excess salts, toxicities, and workability.

These factors take into account everything from nutrient density, the pH levels of the soil, the presence of toxins like calcium carbonate and gypsum, salinity, stoniness, drainage…the list goes on.

But at the end of the day, it’s about matching the right product to the right soil. Every crop has a distinct biological profile, and therefore prefers certain soils. Coconut, for example, does best in sandy, laterite soils typical of tropical regions, which help prevent waterlogging and stimulate oxygen absorption at the root system.

Another crucial agronomic factor is climate. Precipitation, ambient moisture, luminosity, and other climate-related factors can make or break the performance of a farm. This is again a question of matching the proper crop to the existing climate conditions. And in the ever-evolving world of global climate change, it’s not as easy as it seems.

Case in point: up until recently, the state of California (a leader in U.S. agriculture) was suffering a historic drought that massively increased production costs for farms in the state. Although water is becoming plentiful again in the region, experts warn that the state’s water problems are far from over due to the changing climate and over-usage by cities.

Increasingly, water equals value in the farmland space. From climate scientists to institutional investors, many have realized that changing weather conditions will necessitate changes in farmland strategy. Combined with soil quality, these agronomic factors are major determinants of farmland value.

Coincidentally, Colombia happens to possess some of the world’s most fertile soil and is one of the highest-ranking counties for precipitation by area on Earth. Food for thought.

Market Access

So now we’ve got a quality location with high appreciation potential, we've got high-quality, nutrient-rich soil with plenty of rainfall - now what? That is to say, what do we do with the produce we grow?

The reality is that no matter how carefully we analyze the two previous factors, if the sales aspect isn’t well thought out, the farmland in question isn’t going to be as successful. This means that solutions for commercialization have to be put in place.

Once again, this is much more intensive than it sounds. Markets are idiosyncratic: each has its own preferences, seasonal consumption spikes, and trading dynamics. It’s far more complex than simply saying there’s strong demand in this or that country.

For example, in any given crop category, quality is going to vary even within a single harvest. A successful farm needs to develop sales channels that can accommodate the full range of its production; sizes, quality, coloration, etc. The less time a farmer spends thinking about where their products will be sold, the more time they have to concentrate on farming itself.

Successful farmers will have built out sales channels that can absorb as much production as possible across the various specifications that the crop may produce. But this is only half the battle. The other half is the ability to bring those products to the market in question.

In the case of exports, this can only be accomplished through free trade agreements. Like with zoning changes, new free trade agreements between countries can lead to rapid increases in the value of agricultural land. Especially favorable are the much-coveted FTAs with the U.S.A, which only 14 countries - including Colombia - can boast.

Free trade agreements are a major benefit to any exporter, agricultural or otherwise. But the value of imports on farmland values, while indirect, can also be widespread. Consider the impact of tariff-free access to U.S. financial services that can provide farmers a wider range of financing options. With freer markets come more participants, more competition and, ultimately, more value.

Where Do These Factors Converge

To recap, we’ve got three major factors that drive the value of farmland: geographic location, agronomic conditions, and market access. Together, these are proven criteria that have led to outsized results time and again, across continents and crop types. So where do these factors come together next?

By now you’ve likely guessed that the place that we’ve identified as meeting all of these criteria is Colombia. Colombia has rapidly developing infrastructure that will connect key farming regions with strategic sea lanes. It has an ideal combination of volcanic soils, high precipitation, and stable temperatures. It has free trade agreements in place with the U.S., the E.U., and other major economies. It checks all the boxes.

But if you want to get in ahead of the curve on Colombian farmland, the time to act is now. As we’ve written previously, international interest in the country is skyrocketing and expats and investors alike are flocking to the country. Colombia is a well-kept secret no longer.

Use the link below to schedule a session with our staff. We can help you get started on your path to owning farmland in Colombia, whether you’re just getting started in the farmland space or an experienced player looking to expand your holdings.

Best,

The Farmfolio Team