Why institutional investors are pouring money into farmland

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Farming is generally not considered a lucrative profession. However, agricultural land is sought as a reserve of wealth in difficult times.

Investment surged after the financial crisis and when the pandemic hit. Asset managers see it as an inflation hedge that diversifies a portfolio and produces consistent returns. But its reputation as a safe haven could be threatened by a changing climate.

Farmland remains a niche asset class. In the United States, institutional ownership represents at most 3 percent of the total. But it has been growing rapidly, and the value of investment groups’ U.S. farmland holdings has more than doubled to $16.6 billion in the three years to 2023. Along with those in Australia and Brazil, farmland values US farmland has outperformed recently, according to Savills. Over 20 years, global profits average about 10 percent a year.

According to Knight Frank, the value of American farmland is largely tied to commodity prices. In some other markets different factors come into play. In the UK, for example, tax rules and the subsidy regime are important. Large plots of land rarely come on the market. A £260m joint venture transaction in March was a rarity. The deal, involving 21,000 acres, represented the first foray into agricultural land and “natural capital” for Royal London Asset Management. The fund manager says greater use of “regenerative” techniques can reduce the environmental impact of agriculture.

Some techniques improve soil fertility and sequester carbon. But the carbon transition (think solar panels or tree planting) often diverts land from agricultural use. This adds to the pressure on land which, according to some estimates, will have to increase its production by 50 percent by 2050.

At first glance, higher productivity should translate into higher land values. But it’s not safe. American economist Robert Shiller, who shared the 2013 Nobel Prize for his work on asset prices, has argued that innovations such as lab-grown meat from stem cells make it “far from inconceivable” that the price real estate may fall over the next century. . There are precedents. In both the United States and the United Kingdom, the value of agricultural land fell by a quarter in the 1980s.

Increasingly, investors will need to take climate change into account. Floods, droughts and rising temperatures could make some land unsuitable for agriculture, while opening up new opportunities elsewhere. Britain’s fast-growing wine region is an example of the latter. French winemakers Louis Pommery and Taittinger are among those who have planted vines. Agricultural land is a long-term investment. Geographic diversification can mitigate risk.

vanessa.houlder@ft.com

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