Valiance Farmland Fund’s Mark McLornan sees potential for rising soft commodity prices

Mark McLornan, Principal of Valiance Farmland Fund, says the potential for return from the sector continues to grow as the global population increases.

Here are some interesting interconnected statistics:

• The world’s population has quadrupled in the 20th century and doubled since 1960. It has increased by one billion people – three times the US population – in the past 12 years. Every four years we add another US population. This growth is creating a tremendous demand for food, water and land.

• Since 2007, the global urban population has exceeded those living in rural areas – meaning, quite simply, that there are fewer people growing food.

• At the same time, the Food and Agriculture Organisation (FAO) of the UN estimates that food production must increase by 70% over the next 40 years to feed the world’s growing population.

• That may be a difficult goal to realize, as over 20 million hectares of farmland – the equivalent to England, Scotland and Wales combined – vanish each year due to economic and industrial development, urbanisation, and the pressure of population growth.

• In addition, according to the US Department of Agriculture, the productivity gains of the last green revolution in the 1970s are fading, such that the growth in crop yields is now 1.2% versus 2.4% in the 1990’s

You might want to call these statistics ‘alarming’, rather than merely ‘interesting’. We could be looking at a global food crisis. Grain stocks, the foundation of our food chain, have declined to historically low levels since 2000 with no meaningful recovery despite “record harvests”, while input prices – for seeds, fertilizers and oil – are on the rise.

When the FAO Cereal Price Index doubled in the year to April 2008, food riots in 23 countries prompted a global crisis. Another round of increases, of similar extent, was triggered in mid-2010 in the aftermath of poor harvests and export bans in Russia and Ukraine.

What this means is clear. The prices of agricultural products, particularly grain, will increase in coming years, as will the value of productive agricultural acreage.

Farmland has been one of the best, if not the best, asset classes for the past 10 years. This has been driven by a structural change in 2000, when the global demand for food exceeded supply. (Between 2000 and 2012, the global population increased by 1 billion, three times the US population) It is unlikely that this imbalance will be resolved for at least another 10 years as supply side increases will be very slow to come to fruition, after decades of under investment.

With farmland prices in Brazil currently 20% of farmland in the UK, and able to produce two crops a year, Valiance decided to partner with the industry leader in Brazil, SLC Agricola, which has a $1bn market cap, to create productive farmland from barren land, whilst still maintaining a strong focus on all environmental issues.

The focus is on Brazil, which is rich in sunshine, rainfall, water reserves and flat land, where investors can get in excess of a 20% annual return through farmland development with the correct local partner. This is significantly higher than in the UK, USA or Europe.

Farmland, if selected and managed correctly, will significantly outperform most other asset classes. One has to expect a continuation of the under-performance in the Western industrial, commercial and retail sectors as debt reduction forces further austerity. It would be quite possible to have record high food prices and a global recession. Farmland offers diversification and is a real asset which will protect wealth from inflation.

Precise timing in agricultural commodities is difficult as the weather plays such a large factor. However, what we do know is that the global stocks of grains have collapsed since 2000 and since this point the prices have increased on average 14% to 15% per annum. This trend is likely to continue.

If any of the major grain producing regions have a drought in 2013, prices could easily double from here.

Studies have shown that farmland has a very low correlation to most other asset classes, and returns since 2000 back this up. As such farmland provides diversification, again if selected and managed correctly. In addition it is a real asset that will protect against inflation and preserve wealth.

Over the past few years more investors have begun to understand the benefits of farmland; however actual investment has been slow. We expect this to change in 2013 as more capital is allocated to the sector.

Investors worldwide are increasingly seeing the high potential up-side of investing in agriculture. They recognize that agriculture is as important a part of their portfolios as oil and other commodities, as well as playing an increasingly important socially responsible role. This is good news for all of us.

 

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