Shrinking Arable Land and the Case for Direct Farmland Investments

Anyone who reads the news or goes to the grocery store these days would surely be aware of the skyrocketing cost of food globally. In a world where global population is predicted to climb from 7 billion to 10 billion people by 2050, and it will be an increasing challenge to feed this growing number of human beings.

One of the major reasons for the challenge the world faces around food security is the shrinking amount of arable farmland globally. According to the United Nations Food and Agriculture Organization (FAO), the amount of arable farmland per person globally was approximately 9 hectares in 1960. Its is currently approximately 2.5 hectares per person and will drop below 2 hectares per person by 2030 and the global population continues to grow.

China is now facing this problem of shrinking arable farmland. To take a more specific example of this trend, China currently contains 20% of the world’s population, but only 7% of its arable farmland. Within the broader Chinese economy, investment in farmland has been shrinking, with farmland frequently plowed under to make way for new factories and real estate development.

According to a report from agricultural consultancy Colvin and Co., the Chinese government estimates they need to maintain 120 million hectares for crop production until 2020 in order to be self-sufficient in grain production. Bank of America estimates that China’s arable farmland has already fallen below the 120 million hectare threshold and could decrease to 117 million hectares by 2015.

Already, China is becoming a net importer of food. According to a report from the US Grains Council, China will import some 1.7 million tons of corn this year, 5.8 million tons next year and as much as 15 million tons in 2014-2015. This makes China’s food security dependent on outside countries, a situation which makes the ruling Communist Party extremely nervous.

The point here is not to get bogged down in facts and figures, but to have investors think about the big picture. From the investing perspective, China’sUS$3.1 trillion of reserves ensures that when China wants or needs something, it is able to go out and buys it. Food and farmland are no exception. China has responded to the issue of food security by making increasing numbers of agriculture investments outside its borders, and Chinese global farmland investing will likely only continue to grow in the future. Just as one example, Chinese state-owned agriculture enterprises have been making huge investments in Australia, as well as in South America and Africa.

How to play the Chinese agricultural interest in purchasing farmland as well as the broader macro-economic perspective of shrinking arable farmland globally? Simple economic principles of supply and demand dictate that when there is an increasing shortage of an asset combined with growing demand for it, the prices of that asset are likely to go up. Savvy investors can track the locations of China’s global land investments, and then look at opportunities for investment in farmland in the same locations. Just as an example, Sub-Saharan Africa holds 60% of the world’s remaining uncultivated land suitable for farming and has seen a particular surge of interest from both Chinese state-owned companies as well as Persian Gulf Sovereign wealth funds, reflecting these nations’ concerns for their food security. Pension funds are also diversifying into African agricultural farmland investments.

Farmland investment has historically been dominated by larger institutions, but in just the last two years a number of options have been developed for individual investors. These farmland investments for individuals generally pay regular yearly income from the sale of crops such as rice or wheat, and depending on the location the underlying land itself can also increase substantially in value. Retail investors are generally able to see their individual parcels, or else the project originator may actually sell its entire project, thereby allowing the individual small investors the opportunity to share in the upside capital gains that result.

Whilst an alternative investment such as farmland should constitute only a small portion of an individual’s total portfolio, farmland is one of the more investing intriguing options for accessing both China’s growth and the challenges its economy faces going forward.

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