Investing in agriculture: Why farmland is an emerging favorite with the affluentArticle added by Jason Lampa on April 20, 2011
Jason Lampa MBA

Jason Lampa

New York, NY

Joined: January 31, 2008

Faced with a low return environment, investors are investing in farmland because it has historically provided an inflation hedge with competitive returns. The key to success in this investment category is working with an experienced sponsor who has long-standing relationships with farmers and those associated with the agriculture sector.

Wealthy Americans and private funds alike are gobbling up Washington apple orchards, Illinois cornfields and Louisiana sugar plantations for good reasons.

Faced with a low return environment, investors are investing in farmland because it has historically provided an inflation hedge with competitive returns. The key to success in this investment category is working with an experienced sponsor who has long-standing relationships with farmers and those associated with the agriculture sector.

Farmers are businessmen. Through the use of technology, they extract as much production from the land as they can while keeping costs down, managing specific risks and conserving the land. In a recent trend, farmers have been actively engaging owners to ensure they will remain on the farm for many years. You, as the owner, benefit from this open line of communication.

For the eternal pessimists who are thinking about the illiquid nature of this investment opportunity, understand that the best thing you can do for a client is to put them in investments where their natural behavior to buy and sell is not allowed. If a client needs liquidity, create a cash bucket and set up a securities-based line of credit on their securities. My apologies to the pessimists if the aforementioned is too complicated for you to explain to your clients. I completely understand your pessimism toward anything you do not understand. That incredible mutual fund wrap platform in which the home office selects the investments must have served you well in 2008.

Although this marketplace is attractive in many ways, institutional investors characterize it as being labor intensive, lacking liquidity and having few investment managers. Others say it's hard to find historical data. You may be thinking, "Why is this a good thing?"

When institutional investors flood a particular marketplace, it increases the efficiency of investing, crowds out retail investors and drives the rates of return below that of inefficient markets. This incredible opportunity to achieve high levels of appreciation and income is a result of inefficiency and lack of institutional interest. The retail investor is able to compete on a fair playing field.
The price of wheat, corn and soybeans can be volatile, but the land that they're grown on is finite. People need food to survive and as mentioned above, the worldwide population will continue to grow. These factors as well as others lead to this investment category having a negative correlation to the stock market. In other words, the prices of the stock market move inverse to the price of land utilized to grow food. There are few investment categories that when added to equities mitigate your overall portfolio risk in the real world. This happens to be one of two we know exists.

There two important statistics to keep in mind: The world population is expected to grow by 50 percent by 2050, and food production will need to rise to meet the demand. It is clear that both private companies and government institutions are going to have to funnel money into agriculture to meet the rising demand. This process will take many years. While the supply demand imbalance exists, the price of food will continue to rise, those who own the land in which niche crops are produced stand in first position to profit from this opportunity.

In summary, there are three reasons why investing in farmland is suitable for most investors:
    1) Institutional investors have historically been averse to agriculture-based investments — retail investors will not get crowded out, at least not for the foreseeable future.

    2) The world population is growing at 10 times the rate compared to the percentage change in the growth of fertile land — supply demand imbalance

    3) The historical correlation of this investment is negatively correlated to most equity indices — real diversification.
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