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AGRO-ECOLOGICAL BLOGFARMLAND IN 2012What are the prospects for farmland as an asset class in 2012? Eurozone crisis, Mid-West US asset bubble, drought, flood and growing demand for higher protein out of Asia. These factors are all part of the mix as 2012 kicks off. The Eurozone crisis is an immediate issue that if it went horribly wrong would generate an impact similar to the financial crisis of 2008 in direction if not scale. This would be negative for commodity prices and therefore potentially for asset prices and very damaging for over leveraged farmers wherever they reside. Drought, flood and growing demand offer pressure on prices the other way. Extreme climatic events are becoming more frequent and more severe. This has a negative impact on yield/supply of crops with obvious implications for prices. These climate change driven factors combine with expanding demand to provide the fundamental drivers behind the ‘agriculture story’. They also create the potential for price squeezes in 2012. The asset price bubble in the Mid-Western USA is geographically specific (obviously!) and the increase in asset prices is in theory underpinned by commodity prices. A number of questions arise however, such as how much leverage is involved? Are the prices paid really based on returns from farming? And what does happen if commodity prices drop 30%? In addition remember that interest rates are at historically low (very) levels. If you consider precedent in the farming sector then it becomes clear that it has been increases in interest rates that have proved so problematic. While the risk of rising rates currently feels remote it is not overly radical to point out that they won’t be this low forever. There are certainly farmland locations in the world that are not in an asset price bubble whether real or imagined. Farmland investors, or those intending becoming so, therefore need not feel trapped by the situation in the US. There are other locations, enterprises and approaches. The bottom line is, whichever of the scenarios outlined above comes to pass (and it could be all of them), in the context of the time frame you should be considering farmland investment over, it is largely immaterial. That is not to discount the materiality of climate change and the importance of having a production system adapted to the best degree possible, but merely to emphasise the importance of taking a genuine long view of the asset/investment. This is the complete opposite of the quarterly performance angst that is currently associated with investment. I would suggest that this is an approach consistent with trading, which is quite different to investment and therefore inappropriate for farmland as an asset class. Investors (as opposed to traders) should feel quite relaxed and positive about farmland and farming performance this year…or at least in those regions where there is low or no subsidies and where agriculture is practiced at a world class level. In farming it is important to focus on the things you can control and leave the rest to do whatever they will do; be it climate or European politicians. Farmland, outside regional specifics, will remain secure, stable and far more attractive in terms of returns than cash. Its performance in the immediate will be impacted by the season (weather), the political environment and the state of country and global economics which will all impact on commodity prices. Over the long term it will be determined by the quality and knowledge of the management. And so has it always been.
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