It is harvest time again in the UK with grain making its way from fields and barns via grain merchants to mills or silos for storage. Farmers will be looking for decent grain prices to cover their input costs like fertiliser, seed, or fuels and drying costs especially if cutting still in September. Friend and fellow private investor Mustard Man noted that this year “yields are down on average but with the late summer sunshine [has created] a greater percentage of milling wheat than average.” This bodes well for those farmers with better quality grain to sell. The grain markets are dominated by large trading houses such as ADM, Bunge, Cargill, Louis Dreyfus collectively known as the ABCD of global commodity trading. Glencore Xstrata the new mining trading combine also has a global market share in soft commodities.
Commodity trading is a specialist market prone to demand and supply volatility due to weather or climate phenomena such as El Nino, also ethical issues such as GM crops and bio-fuels production or geo-political upheaval or trade restrictions and natural disasters. Therefore with the exception of a commodities EFT I held a few years back I leave commodities to the traders and market specialists however there are other ways of investing in agriculture.
Farmland and forestry are part of my overall portfolio forming alternative assets to equities and hopefully spreading risk and reducing market correlation of quoted asset classes notable over recent years. However, it is still a property investment and like all other all other property investments in the UK the price of farmland and forestry acreage has risen rapidly since 2004. Depending on your location the price per acre has risen from about £2300-2500 in 2003/4 to £6-7500 in 2013 even at the lower estimates that a good return if bought back then.
Apart from the capital increase with tax breaks and benefits reliant on government support are non-farming investors aware of the difficulties, some mentioned earlier, of making farming profitable such as harvest time is the only time in the year an arable farmer recoups his investment (Livestock again is different). This risk can be difficult to appreciate for say a hedge fund manager keen to gain exposure to an alternative asset class. Financial yields on arable crops are 3% approx. or lower if inputs are high. Thus, economies of scale are important and arable farms in the US, Canada, Ukraine, Brazil and Australia cover huge acreages. (Agcapita.com is worth a read for information on Saskatchewan farmland and economic comment generally. NB. I don’t invest with them).Smaller farmers in EU countries often form collectives or contract work or rent acreage from others unwilling to take the risk of producing the crop.
The EU’s Common Agriculture Policy (CAP) a subject which could fill a blog on its own which provides subsides and grants such as the Single farm payment (SFP) often critical for the income of smaller or marginal farming units although all enterprises can utilise the many grants available for diversification of incomes through renewal energy initiatives, hedge row conservation and promotion of heath or grasslands for wildlife sanctuaries or tree planting schemes and farm shops. There’s are many political and ethical issues raised by the implementation of the CAP as it’s uses 42% approx. of the EU budget (source- Wikipedia ) and many criticise the distorting effect it has on world food prices through input tariffs and surpluses and intervention in certain crops.
There’s a certainly an appeal to the life of a country gentlemen in the UK from wealthy” City” buyers although those tax benefits will be reduced if they’re not actively trading. HMRC want active farm management along with rural investment if an investor is to gain from the reliefs and exemptions provided. The keeping of horses doesn’t qualify as active farming. These grants and schemes do require administrative time and costs also implementation too. Therefore direct investors in assets should be committed to active management. There are plenty of consultants and agents to provide management assistance as my own forestry asset does as an example. The fees are another factor to consider when tendering a bid for land.
Global population is predicted to grow to 9Bn by 2050 driving demand for food, both cereals and meat, with diminishing fresh water supplies and fertile productive land. This is seen a positive long term investment case by investors and their advisors also with a dearth in the number of active farmers in the developed world food producing areas. Therefore, research and development in plants types and seeds including genetically modified plants (GM) reducing the use of water, fertilisers or pesticides and thus cost to producers especially in the developing world also adds to the longer term investment case. A controversial issue for some but perhaps it will become a necessity in the coming decades.
It also allows me a different opportunity in making investments in large quoted global companies involved in seeds, fertilisers, water irrigation or plant and machinery without being further directly involved.
In conclusion – is it a worthwhile investment? Yes, depending if you have at least at 12 year investment period and don’t expect asset values to continue upwards at the rate of recent years and research the best opportunities directly or with companies involved in supplying the industry with new technologies to save input costs and reduce environmental degradation. Investing for tax breaks and the country life may appeal but may not produce a financial return if you need to care.
However, they don’t make it no more either as Mark Twain said mind you if they can build an island off Dubai for expensive houses why not for vital food crops in the future?
It’s a huge topic so do your own research and I’ll discuss again in another blog.
LDC