Should you have farmland in your investment portfolio?
"Buy land, they're not making it anymore" – Mark Twain
As part of a well-diversified portfolio, investors should consider holding assets other than shares, fixed-interest bonds, index-linked bonds and cash. One such asset is agricultural land, the price of which in the UK has risen by 135% in real terms during the last ten years.
Farmland isn't the easiest of assets to buy, since the biggest owners in the United Kingdom are The Crown, the Church of England, local authorities, farmers and private investors, few of whom are in the business of selling.
So how can you get a piece of the action? And should you?
Everyone must eat, so until we develop something similar to the replication technology in TV's Star Trek, we'll need to devote land to agriculture. The rising global population, as well as the growing use of land for biofuel crops, is increasing the demand for food, which in turn is pushing up farmland prices around the world.
This was borne out by The Royal Institution of Chartered Surveyors (RICS) in its Rural Market Survey for the first half of 2011, published last August, which showed that average farmland prices had risen by almost 12% over the previous twelve months.
Some of the price rise has been fuelled by an inflow of money from hedge funds, led by the likes of George Soros and Jim Rogers. Rogers has been a particularly big buyer of farmland for many years.
A few numbers
In another report, RICS noted that the average price per acre in the first half of 2011 had risen to £6,115 whilst the typical yield on arable land had fallen to 1.75%.
The low yield makes me a bit nervous about farmland as an investment, as you can currently get yields of 6% or more on UK commercial property, with fairly secure tenants.
How to invest
As I said earlier, investing in farmland isn't easy. It either requires a similar amount of work to buying a commercial property, with the associated hassle of then renting it out, or you'll have to track down a specialist fund with farmland interests, which will demand a large minimum investment.
Sprott Resource Corporation is essentially a hedge fund with farmland interests which is quoted on the Toronto Stock Exchange, so it's suitable for small investments. But it also owns a large stock of metals, as well as a portfolio of oil exploration company shares and other investments, so farmland only represents a part of its portfolio.
Although many property companies are quoted on the London Stock Exchange, I haven't found any there which primarily own farmland. The closest is M.P. Evans Group (LSE: MPE), whose two businesses are farming beef cattle in Australia and palm oil plantations in Indonesia.
At 400p per share, the forecast for 2011 puts M.P. Evans' shares on a prospective price-earnings (P/E) ratio of about 11.4, whilst they yield 1.2%.
Companies which supply farmland
An alternative is to look at companies whose business is supplying the global farming industry, such as agricultural machinery manufacturers AGCO (NYSE: AGCO.US) and Deere & Company (NYSE: DE.US). With there now being seven billion of us on the planet this should boost the sale of agricultural machinery!
Other businesses that should benefit from the ever-rising global population are the agricultural biotechnology company Monsanto (NYSE: MON.US) and PotashCorp (NYSE: POT.US). The latter is the world's biggest producer of potash (a vital ingredient in fertiliser), which last year warded off a hostile takeover bid from the world's biggest mining company BHP Billiton (LSE: BLT).
The Land of Silver
The purest farmland company I've come across so far is Argentina's Cresud Sociedad Anonima Comercial Inmobiliaria (NASDAQ: CRESY.US), commonly known as Cresud, which owns over a million acres upon which it farms crops, sheep and cattle.
In addition to its farming interests, Cresud owns almost 600,000 acres of natural woodlands, as well as a majority stake in a commercial property company with has substantial interests throughout Argentina.
Cresud's ADRs currently trade in New York on a P/E ratio of about 12 and yield just over 3.2% gross. Whilst Argentina's economic track record over the last few decades doesn't exactly inspire confidence, to put it mildly, Cresud has been trading for over 75 years so it must be doing something right.
Investors who are looking to diversify their portfolio in a big way might consider that Cresud warrants some further investigation. There's no need to speak Spanish, because the company also publishes its results in English!
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