International Farmland Investment

Transcription

1 NEWS LETTER International Farmland Investment InvestAg

2 Institutional Appetite for International Farmland Grows Institutional Appetite for International Farmland Grows With over 9 billion mouths to feed on the planet by 2050, food security is increasingly dominating the international agenda. The UN Food and Agriculture Organisation estimates global food production will need to increase by 70% over the next four decades. As a result, international farmland is becoming an increasingly sought after investment. Institutions with a thirst for alternative investments are attracted to this newly prominent asset class due to its stability, lack of correlation with other asset classes, anti-inflationary tendencies and past performance. However agriculture and farmland until relatively recently have not had a natural home in the investment portfolios of the mainstream institutions/pension funds (with some exceptions) and the majority of farmland around the world is owned by private families. Even in the US, which probably has the highest level of penetration into the sector, institutional ownership is less than 0.5% of the entire farmland market. This is now changing and could potentially revolutionize the quantum of investment in the sector overtime. Pension funds currently manage approximately US$23 trillion of assets, of which US$100 billion are believed to be invested in commodities, with US$20 billion of that thought to be invested directly in farmland. By 2015 the institutional exposure to commodities and farmland is expected to double. Some institutions will be looking for investment products that give them liquidity. Others will be nervous about exposure to the volatility of farming returns and may prefer to own land leased to farm operators, be it directly or via investment funds. Agriculture does not fit easily into institutions real estate portfolios. Nor does it necessarily fit into their alternative asset portfolios, where they demand returns in excess of that which agriculture can normally produce. The institutions are therefore starting to create new specific asset allocations. To warrant them doing this, they need to satisfy themselves that they can invest significant amounts of money, be it via direct or indirect investments. Ten years ago there were almost no publicly marketed international farming investments available for third party investors to participate in. According to a recent report prepared for the OECD, within the last four or five years 54 international publicly marketed agricultural farming investments have successfully raised subscriptions around the world, with a total current mark capitalisation of approximately US$7.4 billion. This trend is expected to continue with the corporatisation of agriculture and the increasing number of new agricultural investment funds typically targeting IRR returns from 8-18%. As a new asset class for institutions, one of the challenges is operating in a sector which is new to the demands of the large institutions and has a majority of first time asset managers. Historically access and execution into this relatively illiquid asset class has been difficult and specialist skills are required to make and manage investments. 1

3 Farming is a detailed day to day business, so strong local management teams or operators are important. Agriculture can sometimes be a challenging investment, but it has great potential and there are now an increasing number of institutions and investors looking at ways to overcome the barriers to entry. As the farmland investment market becomes a global phenomenon, international investors are turning to investment advisors and asset managers such as InvestAg for assistance. In the last couple of years InvestAg has seen the most institutional activity in the sector from selected continental European and US institutional investors, alongside the hedge funds who were the pioneer financial investors from outside the sector. In the last few months we have started to see an increasing interest and activity from main stream institutions. Pension funds are often looking to make sizeable and diversified investments where there are stable land rights. We have seen some of the greatest interest and investment activity in the likes of Australia, Brazil and the US. Those institutions looking to diversify their portfolios even more globally are now looking at other markets such as Central Europe, which benefits from being a member of the European Union, as well as developing nations. Farmland is increasingly attractive to pension funds as a source of long term fixed income stream and a commitment ideally of a decade or more is required to achieve good returns. A geographically diversified portfolio is attractive for risk diversification, as it smoothes out the volatility of returns, giving a spread of exposure to: the underlying agricultural commodities, climate, currencies, economies, politics (e.g. subsidy reform, foreign ownership restrictions etc) and local market conditions. Land Values Continue to Rise Whilst from the 1950 s to the mid 1990 s real land values increased only 1-2%, during the mid 1990 s they stepped up a gear (even though grain prices were flat) due to international government debt financing. Even in 2005 land still looked relatively cheap, but since then land prices have changed dramatically with a strong continued upward trend. This is as a result of: increased commodity prices fuelling farmer confidence, the macro story, demand for investors for alternative investments and the printing of money on a massive scale. Where other property sector values may have collapsed in many parts of the world, agricultural land prices have remained pretty resilient. In contrast to some other sectors, the agricultural loan book continues to grow, largely due to rising land and crop values since 2008, driven by increased demand and volatile supply factors, such as unpredictable weather conditions and water shortages, exacerbated by climate change and civil wars. With demand continuing to outstrip advances in farming technology, combined with rising affluence in emerging economies such as China and India, where genetic modification for growing food crops is currently outlawed, prices show few signs of falling, other than short term blips, for the next four decades or so. Major World Agricultural Land Market Trends. Increase in Cereal Production Essential Huge emerging middle classes in countries such as China, Brazil, India and Indonesia will increasingly demand higher-protein foods. Protein from beef, sheep, chickens, pigs, cows and fish will in turn displace grains in the diet of these burgeoning middle classes. Yet the raising of these animals, especially cattle, will require vast tracts of pasture and range lands or, if they are grain-fed, huge amounts of grain grown on broad-acre farms. China, for example, a country of over 1.3 billion people, has increased its annual per capita meat consumption from 20 kilos in 1985, to more than 50kg per person now. With 8 kilos of grain needed to produce one kilo of beef, the recent spike in Chinese grain and soy demand for US or Latin American animal feed is set to surge still higher, which is leading China to invest in land and crop production around the world to shore up its supply chains. At this rate, by 2050, annual cereal production will need to reach about 3 billion tonnes from 2.1 billion now, while annual meat output will need to more than double from 200 million tonnes to a staggering 470mt. At the same time pressure on production supply continues with: productivity improvements having slowed in the last few years, urbanisation, demand for bio-fuels utilising land previously being used for food production and climate change. Availability of New Land Areas Spurred on by the 2008 food, fuel and financial crisis and continuing food volatility, a recent World Bank study 2

4 says that the number of reported large scale farmland deals amounted to over 45 million hectares in 2009 alone, over 70% of which were in Africa. This compares with an average expansion rate of 4m ha a year in the decade leading up to The World Bank study also predicts the current wave of interest will continue, albeit with tighter criteria applied in some countries. Even under conservative estimates, in developing countries 6m ha of additional land will come under production each year to Two-thirds of the expansion over the next 20 years is likely to be in sub- Saharan Africa and Latin America, where farmland availability is still relatively abundant. The World Bank estimates that the countries with the largest amount of land available are Argentina, Australia, Brazil, Democratic Republic of Congo (DRC), Mozambique, the Russian Federation and the Sudan. These seven alone account for 224m ha of land or over 50% of the total global farmland available. In Brazil for example its agriculture minister Wagner Rossi recently said that 120m ha of land was ready to be cultivated. By marginally improving Brazilian ranching efficiency and converting pasture land to crop production, huge gains can be made. Potential to Increase Existing Land Capacity Part of the supply problem is that agriculture has not had the research and development budget required to improve production significantly. In other industries you can see the rewards of big research and development budgets e.g. the car industry has seen dramatic changes in fuel consumption and the development of hybrid cars. In agriculture, there is considerable scope to increase productivity on currently cultivated land, which could have significant impacts on poverty, job creation and food security. This could range from a greater application of hybrid seeds, precision agriculture, making farming more capital efficient and utilising additional land. and palm oil, largely for food, animal feed and bio-fuels. Food security concerns have led to an upsurge in investments for wheat, mainly from Middle Eastern countries such as Saudi Arabia and the Gulf states. The most suitable largest uncultivated areas are in both Argentina, with an additional 1.8m ha potential (4.2m ha currently used) and also Russia, with an extra 10 m ha potential (26m ha currently used). For maize, the total global area for potential expansion is almost equal to the 161m ha already under the crop. Wellestablished producers in Argentina and Brazil already achieve yields of 6.5 and 4.1t/ha respectively, but have the potential to add some 20m ha to the 3.5m ha of maize grown in Argentina and 14m ha in Brazil. There are also big opportunities to expand maize production in Africa. Soybeans are currently grown on some 97m ha of land worldwide, but there are an estimated further 138m ha of potential suitable area available. This is again mainly in Brazil, where some 22m ha have been identified to double cultivation, while Argentina has some 10m ha to add to its existing 16m ha devoted to soy. In Africa, Sudan again has the most soy potential with 14m ha of land, but as with maize little current production, followed by the DRC with 9m ha, and Mozambique with 7m ha available. For sugarcane, over 70% of the land available is in South America, mainly Brazil with 9m ha, and Argentina with 4m ha. In Africa, the main potential is in the DRC at 7m ha, followed by Madagascar with 2.1m ha, but Argentina has both huge infrastructural and yield advantages, at 84t/ha, more than double that in the DRC, at 39t/ha. Palm oil yields in Africa are likewise less than half those currently seen in Asia and South America, although interest is growing. In the recent World Bank study on farmland investment, they argue that concerted efforts are required to allow existing cultivators to close yield gaps and make more effective use of the resources at their disposal, which could slow land expansion sharply while creating huge benefits for existing farmers. They also go onto say that were it not for advances in productivity, much larger areas would have been brought under cultivation. In fact, 70% of the increases in crop production between 1961 and 2005 were due to yield increases, 23% to the expansion of arable area, and 8% to the intensification of cropping. Furthermore, the expansion of land devoted to crops over recent years has been increasingly concentrated on a few key commodities, namely soybeans, rapeseed, sunflower 3

5 Increasing Restrictions on Foreign Ownership Mounting concern of large-scale food security led investments, in particular by the Chinese and Middle East investors, has led to an increase in nationalism in countries such as in Argentina, Australia, Brazil, New Zealand and Uruguay. In some of these countries this has already led to stricter rules on land ownership laws for foreigners and upper investment limits. These countries are joining others or regions within countries, which have had various restrictions for many years e.g. no corporate ownership is allowed in some states in the US. The UN Food and Agriculture Organisation has also proposed that governments set limits on the size of agricultural land sales, but the extent to which tighter regulation will impede investors tends to be overplayed, and in fact, in some countries should create a more supportive environment, such as Russia and the Ukraine, where land titles have historically been a hurdle. Whilst increasing foreign ownership restrictions are something investors will have to live with, it should not prevent institutions securing a diversified farmland investment portfolio. Responsible Investment In September 2011, a group of pension funds (PRI Farmland Working Group), launched a set of Principles for Responsible Investment in Farmland (The Farmland Code), to address increasing concerns over environmental, social and governance issues. The Farmland Code is similar to the United Nations PRI. rights, as well as existing land and resource rights, high business and ethical standards, and reporting publicly on their progress towards implementing them. This shows that much of the criticism from some NGOs and environmental activists is misguided and can be challenged by demonstrating that land investment can in the long-run not only deliver lasting and sustainable returns for pension funds, but also fresh opportunities for the livelihoods of local farmers and their families across the world. With the continued advances in the sustainable intensification of farming, as well as the application of hybrid seeds, climate smart and precision agriculture, and soil enhancing micronutrients such as manganese and zinc, there are scientific solutions that can both help feed the planet and make such investments an ethical choice. However, the World Bank study has shown how the global land investment process is complex and multi-dimensional, rather than simply a rapacious grab by predatory outsiders, as sometimes portrayed in the mass media. But while highlighting potential benefits behind large scale land purchases, the World Bank also calls for increased transparency and monitoring, arguing that in some countries where demand for land has recently boomed, there has often been limited screening of proposals, lack of due diligence and weak contracts, combined with an overriding air of secrecy. It also found that while large scale farmland deals can deliver tangible benefits, limited attention to technical and economic viability as well as environmental and social impacts has sometimes compromised past attempts to jumpstart agricultural growth through large scale farming. Under The Farmland Code investors have agreed to a framework to promote a number of key issues such as: environmental sustainability, respecting labour and human 4

6 NEWS LETTER - International Farmland Investment For further information please contact: InvestAg Henry Wilkes InvestAg +44 (0) hwilkes@investag.co.uk InvestAg LLP A dedicated investment advisory and asset management business for international agricultural investors, with an ability to access and manage significant agricultural investment opportunities in the main farmland markets around the world. This report is for general informative purposes only. It may not be published, reproduced or quoted in part or in whole, nor may it be used as a basis for any contract, prospectus, agreement or other document without prior consent. Whilst every effort has been made to ensure its accuracy, InvestAg accepts no liability whatsoever for any direct or consequential loss arising from its use. This document is not intended to form the basis of a decision to purchase securities or any other investment decision and does not constitute an offer, invitation or recommendation for the purchase or sale of securities or any other investment. The content is strictly copyright and reproduction of the whole or part of it in any form is prohibited without written permission from InvestAg. 5