Bridge over ocean
1 April 2015 CFA Institute Journal Review

Barbarians at the Farm Gate (Digest Summary)

  1. Tokunboh Ishmael

An increasing trend is to invest in the agriculture sector as an asset class. The author posits that this is the result of the high return potential, large capital requirements for running a large-scale modern farm, shifting demographics of farmers, and lack of successors keen to run many family farms.

What’s Inside?

Agricultural investments have outperformed traditional asset classes over the past couple of decades and can provide diversification and inflation-hedging benefits.

How Is This Article Useful to Practitioners?

The gap between the demand and supply of food is widening; global population growth, conversion of farming land into developed cities, and the rising popularity of biofuels are some of the factors exerting downward pressure on farming activity. Resolving the supply-side issues will require significant investment in farmlands and all along the agriculture value chain.

Until now, there has been a lack of structured instruments targeted at the agricultural sector. Today, the large capital requirements and demands of large mechanized farming are fueling innovation in sources and methods of financing for the sector. Plus, the attractive returns that investors have garnered over the past two decades are driving an increase in demand for these financing tools.

Practitioners can expect these agriculture investments to be mainstreamed and so should prepare to understand and/or innovate instruments that will usher in the tide of investments. Currently, according to Preqin, funds focused on agriculture investments manage less than 10% of funds under management in the real estate sector—that is, $15 billion out of the total of over $160 billion. This situation represents opportunity.

The sector has outperformed other asset classes and is becoming more professional as a result of an increasing flow of private equity money and the attendant professional expertise.

Abstractor’s Viewpoint

Investments in farmland and agriculture in general do represent opportunity. But in the search for high rewards, investors who seek this opportunity in emerging economies will do well to partner with career agriculturists and talented individuals experienced in the local terrain and economic issues.

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