Spectre of inflation has large investors eyeing farmland

london / reuters / The hunt is on. Fearful that debt-laden governments will allow inflation to rise and erode the real value of money, many institutional investors are eyeing farmland as an inflation hedge.

But ownership brings responsibilities, costs and risks that need close management.

The inflation-adjusted value of American farmland peaked in 1980, according to the USDA, which now expects a new real peak in 2012. That’s not much in capital appreciation, but the average annual real yield, on current land prices, has been a respectable 2.8 per cent.

U.S. farmland has participated in the last decade’s commodity boom — the real value will have increased at a 4.6 per cent annual rate from 2002 to 2012, if the USDA’s estimate of a 3.7 per cent real increase in 2012 proves accurate.

Farmland is no free lunch, however. It is an illiquid asset and cash flow is volatile — inflation-adjusted income in 2004, the best year since 1980, was twice as high as it was just two years earlier. But by 2006, much of the increase had been wiped away.

That means outside investors have to buy wisely and manage well, and now may not be the best time to buy into mature agricultural economies. Not only is the price up relative to the past, but it is expensive beside land in less developed countries. Insight Investment, the fund management arm of BNY Mellon, estimates that a hectare of land in the U.K. or New Zealand is three times the price of U.S. farmland which, in turn, is twice the price of land in Romania or Brazil.

That’s prompted large investors, including those at Mellon, to seek geographical diversification.

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