The Coming Farmland Boom, Part 1: Value Drivers

From the years 2002 to 2016, farmland in Romania appreciated tremendously. Rising from a meager USD $262 per hectare to a whopping USD $6,372, farmland prices in Romania rose a massive 2432% in a relatively short period of time. This farmland boom drew the interest of investors all over the world.What caused this spike in prices? For one thing, Romania joined the EU in 2007, which contributed significantly to appreciation. But joining the EU didn’t cause land values to rise on its own - there were specific value drivers at play that led to massive appreciation.Farmland booms have occurred across developed and emerging markets, and while each boom is unique, there are certain commonalities that we can extract from each case. Developing a clearer idea of the value drivers that can spark a farmland boom can help us understand why certain markets have developed more than others - and where a boom might strike next.Market AccessIt is curious to think that a piece of farmland could be worth over 24 times its initial value within a 15-year span, as in the case of Romania. After all, what changed? The climate conditions, the nutrient profile of the soil, ambient moisture, and other natural factors remained more or less the same. In truth, the value was always there - the appreciation came from changes to human-controlled factors.One such factor is market access. In emerging markets especially, production tends to be targeted towards the domestic market, and supply chains are generally oriented towards small-scale local production. Directing the ag industry towards export-quality production and employing economies of scale are critical factors in farmland appreciation.Trade agreements often play a critical role in opening up economies and setting the stage for booms in the agricultural sector. In the case of Romania, joining the EU was a pivotal moment, and opened up an entire continent of developed markets with strong demand profiles while virtually eliminating export constraints.Clearly, not everyone can join the EU. But nevertheless, globalization continues to bring the world closer together, and the overall trend is towards more free and open trade policies worldwide. The total amount of global free trade agreements has risen dramatically in recent decades, and all signs seem to indicate an increasing access to markets for the developing world.

Global Trade Agreements On The Rise

InfrastructureThis value driver has been present in many market booms. For Romania, a relatively well-developed river and port infrastructure was key to access to international markets. In other countries, large-scale infrastructure investment can herald a boom for farmland, especially in terms of highways, airports, and sea ports. The importance of reducing transportation costs through infrastructure improvements is impossible to overstate.In Colombia, the oil palm boom showcases the importance of infrastructure in land values. In 2009, with the rise of biofuel production, agribusinesses were looking for land suitable for oil palm. The departments of El Meta and Vichada - which had the best road networks - performed far better than other suitable lands.Land price increases in El Meta and Vichada outperformed the value gains from the rest of the country. According to Dinero magazine, rural land went from 1,2 million COP to 2 million COP per hectare in El Meta (a 44% annual appreciation). And in Vichada, farmland values tripled, going from 100.000 COP to 300.000 per hectare, achieving a stunning 130% annual appreciation.By contrast, well-developed infrastructure can also be a sign that farmland appreciation will slow, especially in developed countries. In the US, for example, farmland saw less than a 1% increase in appreciation. High farmland prices in Europe and Canada are also partially due to the absence of room for infrastructural improvements to lower costs and increase margins.

Infrastructure Investment in Latin America

Legal ProcessesFinally, legal processes are also a key ingredient. Legal infrastructure is just as important is physical infrastructure, and privatization and legal titling can lead to massive transformations in land markets. Increased legal security in land holdings can attract foreign investors and add liquidity to farmland in emerging markets.In addition to reducing poverty and increasing the efficiency of government programs, improvements to legal conditions for land ownership can trigger massive land purchases by foreign and domestic investors. In 2002, Uruguay implemented changes to land ownership and foreign investment policy, resulting in a wave of investment that put the country on the map as an agriculture exporter.In 2002, foreign investors were able to acquire vast areas of agricultural land, totalling over 5 million hectares. Much of this wave of foreign investment was due to decreased restrictions on foreign ownership of land, and to a more secure infrastructure for land purchase and title transfers. Uruguay has since been able to position itself in the agricultural sector, with strong showings in the beef, grains, and citrus categories.

Global Farmland Indexes by Region

The shocking rise of farmland prices in Romania brought a massive 2432% value gain in a relatively short period of time. Although the Romanian case was unique in some respects, it displayed undeniable similarities to other farmland booms worldwide. By understanding some of the key value drivers behind farmland booms, we can begin to understand why some markets develop differently from others - and where a boom might strike next.Read more from Farmfolio.