Tuesday, December 03, 2013

Farmland attracts institutional investors

There is nothing new about farmland attracting institutional investors. There was a surge of interest in the 1970s when it was seen as an asset that would hold value in inflationary times. However, there is a new wave of interest. The UK's £14.9bn Pension Protection Fund has recently appointed a farmland manager. In the US, TIAA-CREF had built up a $4.4bn portfolio by July 2012, encompassing more than 800,000 acres across four continents.

What's the attraction? It gives exposure to commodity prices as well as the return from production. Demand for agricultural commodities is growing as developing countries become more prosperous while supply is constrained by such factors as the availability of land and an assured water supply. Investing capital in, for example, machinery or irrigation could drive up the value of the asset as well as returns.

The downside is that this is not a liquid asset. Investment has to be for the long term. Yields can be impacted by weather events, the uncertainty and magnitude of which could increase with climate change. There are also political risk issues associated with subsidies, trade regimes and tax structures.

What is required is specialist knowledge of the sector. It is important to focus investments in locations that have good soil quality, reasonable infrastructure and access to the markets where growth is occurring. Many investors have been attracted to Australia for those reasons.

There are also potential ethical problems. Swedwatch has criticised Sweden's national pension fund AP2 for a lack of transparency on its Brazilian farmland investments: Swedwatch . It suggests that there may be serious negative impacts on the environment and human rights. Common problems include high use of pesticides, poor working conditions and a loss of biodiversity.

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