Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Farming isn’t generally known as a lucrative profession. Yet farmland is sought after as a store of wealth in tough times.
Investment surged after the financial crisis and when the pandemic hit. Asset managers view it as an inflation hedge that diversifies a portfolio and produces steady returns. But its reputation as a safe haven could be challenged by a changing climate.
Farmland is still a niche asset class. In the US, institutional ownership accounts for at most 3 per cent of the total. But it has been growing fast, with the value of investment groups’ holdings of US farmland more than doubling to $16.6bn in the three years to 2023. Along with those of Australia and Brazil, US farmland values have outperformed recently, according to Savills. Over 20 years, global gains average about 10 per cent a year.
The value of US farmland is largely linked to commodity prices, according to Knight Frank. In some other markets, different factors come into play. In the UK, for example, tax rules and the subsidy regime are important. Large parcels of land rarely come on the market. A £260mn joint venture transaction in March was a rarity. The deal, involving 21,000 acres, represented the first foray into agricultural land and “natural capital” for Royal London Asset Management. The fund manager says greater use of “regenerative” techniques can reduce farming’s environment impact.
Some techniques both improve soil fertility and sequester carbon. But the carbon transition — think solar arrays or tree planting — often diverts land away from agricultural usage. That adds to the pressure on land which, on some estimates, will have to increase its output by 50 per cent by 2050.
On the face of it, increased productivity should translate to higher land values. But it is not certain. US economist Robert Shiller, who shared the 2013 Nobel Prize for his work on asset prices, has argued that innovations such as lab-produced meat from stem cells make it “far from inconceivable” that the real price of land could fall over the next century. There are precedents. In both the US and the UK, farmland values fell by a quarter in the 1980s.
Increasingly, investors will need to factor in climate change. Floods, droughts and higher temperatures could make some land unsuitable for agriculture, while opening up new opportunities elsewhere. Britain’s fast-growing wine region is an example of the latter. French winemakers Louis Pommery and Taittinger are among those that have planted vines. Farmland is a long-term investment. Geographical diversification can mitigate risk.
Read the full article here
