Why farmland


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Farmland opportunities . Why farmland investment

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Why farmland

  1. 1. Why farmland Farmland and agriculture were never considered as mainstream investment classes. However, with a growing world population and the associated need for increased food production, many professional investors are turning to agriculture and farmland as suitable medium to long-term investments, especially as investors look to diversify their portfolios away from equities and into tangible, alternative asset classes. As a result, both private and corporate investors are increasingly entering the global marketplace with a view to direct investment in agriculture and farmland. And so are sovereign wealth funds that consider food security to be put high on their national agenda. Investment Fundamentals Macro-Drivers World’s population growth from 7 billion to 9 billion in the next 40 years: farmland is becoming an increasingly precious commodity. Increasing urbanization. Dietary shifts towards proteins in developing nations. Climate changes, getting clearly noticeable Continual growth of the biofuels industry will all add further importance to the limited supply of land that is available for agricultural production across the globe. Taxation and Wealth Preservation Global equity markets have shown tremendous volatility over the last 5 years leaving a its effects on the financial sector and forcing investors to emphasize preservation of wealth and to look more at diversification of their portfolios. Farmland is a direct, tangible asset with a limited supply and is considered by many investors to be an excellent investment for wealth preservation as part of a diversified portfolio. Depending on the investor profile, their aims and objectives, farmland could also provide a suitable vehicle for wealth preservation through favorable taxation reliefs available on agricultural land and businesses. Non-Correlated Asset Next to the increasing global demand for food, the 2008 world economic crisis has made the long- term stability of agriculture look very attractive. Nowadays agricultural land can produce reasonable cash flows and ‚ returns. It is a direct, tangible asset and a good inflation hedge. It also has a low or negative correlation with other traditional asset classes such as stocks and bonds, giving an interesting portfolio diversification. Income and Capital Returns The income and capital returns achievable on a farmland investment are subject to some variables depending on location, management option, business strategy and some minor factors that affect agricultural economics and farmland profitability. Investing in the ownership of the farmland, however, enables an investor to capture both operating profits and capital growth through a combination of income and land price appreciation
  2. 2. over a period of time. When taking into account the total combined returns, the investment performance of farmland has consistently outperformed many other mainstream assets including stocks, bonds and commercial property across a wide range of markets and timescales. Risk Management Understanding and managing risk is an important factor to consider with any investment, and farmland and farming businesses contain quite some risks that need to be well understood and managed. Some of these risks, such as climate and weather events, are obvious. But currency volatility and global trade policies, are less so. Risks can be managed or mitigated provided the investment is structured to take them into account. In evaluating the suitability of an investment, potential investors should consider the various risk factors relevant to farmland. Exit Strategy With any investment, the exit strategy for the investor is an important consideration, and is driven by their specific criteria and aims. In most instances, to achieve the desired returns from direct investment in farmland and farming businesses, the investment should be viewed as a medium to long-term hold, commonly longer than of five years. In the short term, the year-to-year performance of a farming business is subject to any number of external factors that may have negative as well as positive consequences. Modest performance in the short term can be offset by positive performance over the longer term. A significant capital outlay in the set-up of the farming business, allied to the necessary improvements in the management and productivity of the land in the first two years of the investment, can result in low annual returns on the investment initially. Over the medium to long term, however, the benefit of these improvements is reflected in the returns subsequently achievable. The exit is ultimately driven by the investor‚ investors aims and the prevailing market conditions at certain times within the life of the investment. Investors who are driven by wealth preservation may wish to hold the investment on an indefinite basis, whilst other investors will have set objectives for the investment based on a certain time period, or once a specified performance indicator has been reached. our company recognizes that each investor, criteria will be different, and can therefore tailor the management of an investment to their specific requirements. Paraguay – South America Contact: luisaguilera@bancarios.com