A Great Decade for Agriculture Investment

As the world population grows so does the need for more food. Along with this constant demand for food supplies go changes in diet and a huge increase in the use of biofuel. The combination of these three factors means that investment in agricultural land will be one of the rising stars during this next decade.

To invest in agricultural land is, by extension, to invest in soft commodities, an option that is growing in importance within individual portfolios. This new protagonist is a result of more accessible investment in commodities and their potential for excellent returns.

Commenting in the Times on this new trend, Mike Horseman, an independent financial adviser, said that “Commodities are definitely going to play a bigger part in people’s investment decisions in the future”. He advises that individuals allocate up to 15% of their portfolios to commodities.

Commodities fall into several categories with foods being one of the largest. Foods are also one of the commodities in highest demand. With the global population expected to grow by 1.1% a year until 2019 and 150 new mouths born every minute, this demand is here to stay.

The US Department of Agriculture (USDA) ‘Agricultural Projections to 2019’ report looks at the recent changes in the world economy and the increasingly important role that developing nations play in it. These countries are expected to have the highest GDP growth rates for the next few years, while developed nations recover slowly from deep recession.

The report states that developing nations will constitute 84% of the world’s population by 2019 with China and India accounting for a massive 37% between them. As their economies grow, the populations’ purchasing power also grows. “Economic growth in developing countries is especially important because food consumption and (animal) feed use are particularly responsive to income growth,” says the USDA report.

According to USDA, “developing countries will play an increasingly important role in the global economy and growth in food demand”. As incomes increase, the population tends to change its diet to include more animal-based foods. This is particularly noticeable in China and India where the local populations are eating more meat, dairy products and processed foods (vegetable oils are a major component of these). This type of food is often imported and more expensive than traditional diet components.

Demand for agricultural products is boosted further by the ever-growing expansion of the use of biofuels, particularly in the US and EU. Biofuels are mostly made from agricultural crops. Ethanol comes from fermented sugars found in numerous crops including wheat, corn and beet, and biodiesel from vegetable oils such as rapeseed, sunflower and soy.

In conclusion to its ten-year projection, the USDA says that “the long-term growth in global demand for agricultural products will hold prices at historically high levels” over the next ten years. In particular, corn, wheat and soybean crops are projected to achieve consistently high prices per bushel between now and 2019.

At Obelisk, we believe that agricultural commodities are a win-win addition to an investment portfolio. Not only do they bring all-important diversity, they also provide promising returns. And, unlike some commodity categories such as base metals used in industry, agricultural commodities barely suffer during economic downturns. This is due to an underlying constant demand – people always have to eat.

The combination of “historically high levels” for prices and a constant and increasing demand for more and better food mean that investment in agricultural land is a must for all portfolios over the next decade. And undoubtedly beyond.