The State of Agricultural Investing 2022

Discover the key themes and trends driving investments in agriculture this year and beyond.

Investors may not fully appreciate a diversified portfolio until they come face to face with long bouts of uncertainty. This was a key theme for most of 2021, as skyrocketing inflation and shifts in consumer buying habits upset the balance of risk vs. reward for many traditional investment assets. However, one asset that continued to perform well and even served as a hedge against inflation was farmland.

While most assets perform poorly during times of inflation, farmland has historically not been correlated with the performance of traditional assets. In fact, farmland has produced double-digit returns throughout the last 40 years, far outpacing inflation. And since farmland isn’t a cash asset, its value will continue to grow even if the value of the dollar declines.

Our Agricultural Investment Guide 2022 dives deeper into the current landscape of farmland investments. These are some of the key themes discussed in depth in the guide, which you can download for a comprehensive overview of the opportunity available with farmland.

Investing in Agriculture, Growing the Future

One of the most common questions from potential farmland investors is “Why agriculture?” 

For a moment, forget about the 10 percent average annual return over the last four decades, and the fact that farmland values tend to grow (not shrink) during periods of inflation.

First and foremost, agriculture enables life to thrive around the world. We can’t survive without it, which means it will always be in demand. But there are a few more themes at play that are currently driving additional growth.

The middle class around the world is growing quickly, and it is expected to double in size by 2030. At the same time, people’s mindsets about food are shifting. More people are turning away from processed, pre-packaged options in favor of fresher, healthier choices. This alone increases the demand for farm production. And as more people cross the poverty line and increase their purchasing power, their food preferences will also likely shift toward healthier options.

In total, the world’s population grows about 1.1 percent each year, which means that by 2050, there will be about 9 billion mouths to feed. To accommodate the growing need for food, production will need to increase by 70 percent within the next 30 years just to keep pace with demand. And that doesn’t account for crops grown for non-food use. 

There’s a lot of potential for investors here, given the growing demand and unmet supply. And, as with many industries, this phenomenon also creates more opportunities for offshoot sectors like agritech and sustainability initiatives.

Declining Land to Farm, Increasing Farmland Value

Walk into a Porsche showroom, and you’ll notice they give a lot of valuable real estate to just a few models. Things of high value tend to occupy a lot of space, allowing them to command attention. 

But despite how essential farmland is to life, farming space in some areas of the world continues to decline. 

The 2017 Census of Agriculture noted that the acreage and number of farms in the United States fell from 2012 to 2017 (914 million acres to 900 million acres and 2.1 million producers to 2 million producers, respectively). 

Around the world, more than 70 million hectares of farmland have been added since 2000, but 77 percent of this land has been allocated for animal feed crops and grazeland. Since it’s impossible to create more land, with agriculture expanding around the world, there’s a real threat that eventually, we’ll run out of arable land to farm. 

Consequently, the basic laws of supply and demand tell us that when demand is high and supply shrinks, prices go up. We can allocate more land for farming, but land is still a finite resource, and land that can be used for farming is in even shorter supply. 

In this case of supply and demand, the value of the farmland (and the crops it produces) is high because supply is low, and we can’t create more. This spells good news for investors regardless of what the rest of the economy is doing because farmland has built-in scarcity and always-high demand.

Healthier Eating Habits

More consumers are becoming conscious about the foods they eat, and that can be seen in a few trends. Sugar consumption around the world is on the decline, along with processed and carb-heavy foods. Spending on organic foods is expected to reach a record $679.8 billion by 2027. Veganism and vegetarianism are becoming more than hipster buzzwords. Healthy alternatives like coconut water, citrus flavors, and fig-based snacks are becoming mainstream.

With a growing interest in foods that weren’t as popular a decade ago, such as coconuts, limes, and avocados, consumers are opening new doors for farmland investments. As demand for these crops climbs, the world will need new producers to address it. 

Ways to Invest in Farmland

Traditionally, farmland assets have been hard to access and have historically been reserved for institutional and accredited investors. Those who fit the bill usually face high investment costs, and they often need specialized knowledge and connections to get the most from their investment.

Another layer of complexity is the manner in which farmland is valued. There is no standard model for valuing alternative assets like farmland, which requires extra due diligence from investors to assess opportunities.

One way to invest in farmland is through the S&P GSCI Agriculture Index. There’s certainly money to be made in the stock market, but it’s not the best value for agriculture investors seeking long-term gains. Trends in agriculture stocks are correlated to downward trends in the overall market, and are therefore subject to volatility. 

Real estate is another option for investing in farmland, but the complexities go far beyond land ownership. Farmland values are directly correlated with macroeconomic factors, such as consumer preferences and trade deals.

Crowdfunding provides another opportunity for agriculture investors. It gives investors exposure to investment opportunities, and it allows you to take fractional ownership of a farm without putting boots on the ground. Investors earn a portion of the farm’s cash yields. However, farmland crowdfunding platforms are generally limited to developed markets, specifically the United States. In agriculture, the highest potential tends to be in regions where there is more room for growth, and direct ownership is likely the way to go.

Assessing Risk in Agricultural Opportunities

Each option makes farmland as an investment vehicle easier to access, and each one has its share of opportunities and drawbacks. Finding your best fit depends on a few key areas:

• Product: The type of crop grown and its market demand, transportation logistics, sales channels, and other considerations.
• Investment: Economic stability of the country/region where the farm is located, weather patterns, investment structure, distributions timeline, financial projections, and more. 
• Team: Depth of knowledge of farmers working on the ground, the farm’s track record of success, use and availability of technology, and more.
• Intangibles: Food trends, consumer preferences, experience with similar assets, investment knowledge, and more.

You also need to account for your overarching investment goals as they relate to farmland ownership. Is there a certain type of farm you’d like to own? Does the amount you have to invest align with the size and location of the farm you’d like to own? Farms in the U.S. can be costlier compared to farms in Latin America of the same size, for example. Do you plan on working on the farm yourself, or would you prefer to be a passive investor and collect a portion of the farm’s profits?

The many options of acquiring farmland allow you to take on as little or as much involvement as you want. But no matter your strategy, whether it’s private equity syndication or direct ownership, it’s vital to explore all options and their implications to find your best fit.

4 Crops Where Demand Is Growing Rapidly

There’s even more opportunity for growth when you invest in crops that are in high demand and are expected to sustain that demand for years. Our Agricultural Investment Guide 2022 highlights four crops that have arguably the strongest potential: limes, coconuts, avocados, and mangoes.

Consumers have shown a year-round appetite for limes and similar citrus products, but limes are largely produced seasonally. With steady growth in their global trade value (particularly over the last decade), tropical Latin American countries like Colombia are positioned to help fill seasonal gaps and satisfy the increasing global demand. 

Coconuts are another example of a rapidly growing market with room for growth, namely for the many products they create (e.g., coconut oil, coconut water, coconut milk). Despite the expected boost in demand for coconut-related goods, production isn’t projected to increase accordingly. There’s a significant opportunity for new players to enter the market, and countries like Vietnam and Colombia are taking advantage of ideal climate conditions to step up production. 

The growing interest in avocados appears to correlate with more consumers becoming more health-conscious in recent years. In fact, the global avocado market is expected to climb at a 4.8 percent CAGR through 2025. Currently, Mexico supplies 88 percent of the avocados that make it to the United States (the world’s biggest importer of the fruit), but many Latin American countries are also ramping up production to cater to the growing demand.

Mango export values have surged 60 percent over the last five years, landing the fruit a spot on many investor’s radar. Similar to the coconut, mangoes benefit from versatility, as they are used in a range of processed goods, such as beauty products, purees, and baked treats. 

Crops that are limited in production, enjoy high global demand, and are already high-value concoct the perfect recipe for investors. Each of these four crops has shown significant growth over the last decade or longer, and they are expected to continue their current trend, especially alongside global population growth.

Latin America Is the Perfect Target for Farmland Investment

Given the tropical climates of some Latin American (LATAM) countries, this region is prime for year-round growing, particularly for the aforementioned crops. But crops aside, the values of farmland in LATAM are also increasing. For instance, Colombia saw a 91 percent increase in rural land values between 2012 and 2017, as well as 20 percent growth over the last year. 

Part of what’s spurring these gains is the rise in exports in LATAM countries. The agricultural sectors in countries like Peru, Colombia, and Ecuador aren’t as well-established as some of their neighbors, but these countries are beginning to recognize their potential in crop exports. This creates a perfect recipe for an agricultural boom, and investors can benefit from recognizing these early opportunities.

However, not all Latin American countries will be prime candidates for investors. It’s important to explore each country’s strengths, weaknesses, and opportunities as a whole and not look solely at the agriculture sector. Take Chile, for instance, where the economy has seen significant growth post-COVID ($253 billion USD in 2020 vs. $260 billion USD in 2021). It remains an attractive area for agriculture investors, with agricultural exports increasing an impressive 332 percent between 2009 and 2019. But the country has been plagued by political turbulence and a rising cost of living.

Uruguay is another option that bears a dual narrative for investors. The country’s economy has shown strong growth in the last couple of years, climbing from less than $54 billion in 2020 to more than $55 billion in 2021. The relatively flat geography and abundance of pasture land make it prime for agriculture. But as beef consumption around the world declines, Uruguay’s agriculture sector may be at risk.

Looking elsewhere in LATAM, Peru’s agricultural industry has expanded more than 50 percent since 2008, but its highly centralized banking system (four banks control 80 percent of the country’s assets) makes it vulnerable to external market shocks. Debt-laden Argentina has discouraged foreign investments for years, given its tumultuous economic past. Brazil’s GDP continues to sink despite the increase in arable land and an increased focus on farming.

Panama appears to be the best positioned for exports geography-wise, but its economy was hit hard during the pandemic. So was Ecuador’s economy, and it hasn’t yet worked its way back up to its pre-pandemic figures. Mexico’s economy isn’t as dependent on agriculture exports, which make up just 3.5 percent of the country’s GDP. Meanwhile, Colombia is making massive infrastructure investments and attracting foreign investors as a result, especially with the peso having sharply declined in the last year which makes land especially attractive for foreign ownership. 

Summary

Agriculture continues to make a compelling case for investors looking for passive income opportunities, particularly in times of volatility, inflation, and uncertainty. With an ever-growing global population, an increase in healthier lifestyles, a decline in farmable land, and ongoing economic uncertainty, the agriculture industry as a whole is undergoing significant changes.

More countries are expanding their exports, putting the spotlight on emerging markets (particularly in the LATAM region). Growers are seeking new ways to cater to shifts in consumer food preferences, particularly high-value crops like coconuts, mangoes, limes, and avocados.

The increasing export values of these crops will help to support the continued growth in exports and land values of LATAM countries. However, it remains essential to consider holistic factors on each country’s economy before moving forward with farmland investments that fit your risk profile.

Download the full Agricultural Investment Guide 2022 for a comprehensive look at the industry, a deeper dive into the topics discussed above, and additional guidance on how you can find opportunities in what many consider to be the world’s most rewarding asset class.

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