Why invest in international Farmland?

Agriculture worldwide is very diverse and opportunities to acquire land exist across the globe. Food demand is set to grow in the long term and more farmland will be needed to meet this.  As there is no scope to increase global farmland area, landowner income and farmland values can all be expected to increase long-term.

WORLD AGRICULTURE

Global food production can be split up into a small number of sub-categories shown in figure 1 below. The largest product group by value of production is livestock, representing around 40% of all output. Cereals and oilseeds are the most valuable crop food group, representing nearly a quarter of global agricultural production. 

Cereals and oilseeds, along with sugar, are sometimes referred to as ‘commodity crops’ as they are traded easily, with markets generally being both transparent and global. Prices for most of these commodities are quoted on globally-recognised exchanges, with those located in Chicago (CBOT) and Paris (MATIF) being the most prominent. Other key food groups are vegetables, fruit and tree nuts, often known as ‘high-value crops’ due to their significantly higher unit prices compared with commodity crops.

The largest agricultural-producing continent is Asia, which naturally reflects its large population and land area. At the same time, Asia is a net importer of agricultural products, with the vast majority of its food products grown for domestic consumption. At the same time, Europe, the Americas and Australasia are the three net-exporting continents, indicating a likely comparative advantage as food producers.

Some countries offer better environments for agricultural investments than others. The best countries to invest in are normally those which offer political and economic stability (including stable exchange rates against major world currencies, absence of conflict and governments which uphold the rule of law) and allow relative freedom for foreign entities to purchase farmland.  The global agricultural land area was just under 47.4 million km2 at the end of 2020. This represents a decline from a peak of 48.7 million km2 in 2001. This has been driven by factors including urbanisation (not only building but also construction of transport infrastructure) as well as degradation and erosion in some parts of the world.

GLOBAL MEGATRENDS

• increased global food consumption: as the global population grows, so will demand for agricultural commodities, pushing prices – and therefore farmer margins, rents and freehold prices – higher across the board.
• increased food consumption per capita: as incomes per capita grow, particularly in regions such as Asia and Africa, individual demand for food will also grow, thereby compounding the effect of population growth on food demand.
• urbanisation: as the global population moves from the countryside to cities, food supply chains will become more centralised, benefiting larger-scale farmers and landowners in key producing and exporting regions. Urbanisation is also a contributing factor to the reduction in productive agricultural land available globally.
• changes in diets: income growth can drive not only increased overall consumption of food per capita but also lead to diversification of diets, most notably increased meat, fish, eggs and dairy consumption. This not only boosts producers of those product types directly but also the wider agricultural industry.
• health megatrends: increased health consciousness is likely to further compound diet changes driven by higher incomes, and thereby increase global consumption of foods such as fruit, vegetables and tree nuts.

INVESTMENT PERFORMANCE

Farmland has the potential to provide tangible financial returns to investors. These returns come both from value appreciation between purchase and sale, and from ongoing income generated by the land.

Land price appreciation has been solid across all of the key agricultural economies covered by the Savills Farmland Index. Even when accounting for exchange rates, land price appreciation across those fifteen countries has averaged nearly 10% since 2002.

Cropping can also determine appreciation rates – for permanent crop orchards there is a significant component of the value which consists of trees and irrigation infrastructure, which has a finite lifespan and necessarily depreciates, lowering overall farm appreciation.

Cash yield for farmland investments can be variable, with higher cash yields open to higher degrees of volatility. Income can be generated by leasing land out, with lease rates between 3% (for bare arable land) and 8% (for high value fresh produce land with trees and infrastructure in situ). Leases are generally for periods of up to twenty years with rent reviews between every five and ten years.

Landowners can also directly operate, and can generate higher incomes, typically around 12% of land value for high-value crops, however this does create greater exposure to yield and crop price risk.

Farmland is generally uncorrelated to the performance of other asset classes. It is also a very effective investment to hedge against inflation as shown in figure 3.

REASONS TO INVEST IN INTERNATIONAL FARMLAND

Benefits for international farmland investors include:

• cash yield possibilities: typical lease gross cash yields between 3% and 6%, in some cases as high as 8%.
• potential for capital growth: price disparities exist between countries for farmland with identical physical characteristics and productive capabilities, showing good potential upside.
• possibility to gain scale: larger and/or less densely-populated countries tend to offer a greater abundance of large agricultural holdings, particularly with 500 hectares or more.
• food megatrend exposure: international farmland investors, through buying in major net-exporting countries, can gain exposure to - and profit from - various global food consumption megatrends.
• inflation hedge: studies have shown that farmland prices have historically risen at rates above general inflation, as a result offering the potential for real capital growth over the long term.
• diversification: global farmland is diverse in its physical and financial characteristics, allowing owners to tailor their investment to their unique risk and return appetite. A portfolio can also be built for buyers balancing different risks and returns.
• natural capital potential: large scale holdings can offer greater potential to reach natural capital goals, including but not limited to carbon sequestration.
• renewable energy opportunities: opportunities exist to build scale in solar and wind power generation, amongst others
• tax benefits: farmland in the European Economic Area enjoys the same exemption regime from UK Inheritance Tax as land located in the UK.
• currency/market hedging possibilities: investment in regions such as the United States or the Eurozone – where major agricultural commodity markets are based – can reduce exposure of farmer margins to currency fluctuations.

Adding international diversification to an agricultural asset portfolio can mitigate risks including:

• climate risk: investing across a range of geographical regions and crop types can lessen the impact of a farmland owner’s exposure to localised weather events such as droughts, flooding and hailstorms.
• tax risk: double-taxation treaties and other special exemptions (such as a general exemption from income taxation for operated farms in Poland) can allow tax liabilities for investors in agriculture to be substantially reduced.
• market risk: agriculture investments offer a range of income generation structures ranging from direct operation to long-term cash leases which allow investors to mitigate risk to differing extents.

When buying farmland overseas, local knowledge of the market is essential. Savills clients can benefit from our strong local networks in key agricultural exporting regions of the world including, but not limited to, Europe, the Americas and Australasia.