Thursday, July 23, 2009

Betting the farm

As world population expands, the demand for arable land should soar. At least that's what George Soros, Lord Rothschild, and other investors believe.

By Brian O'Keefe, senior editor Fortune
Last Updated: June 16, 2009: 11:17 AM ET

Over the past few years hedge fund gurus like George Soros, investment powerhouses like BlackRock, and retirement plan giants like TIAA-CREF have begun to plow money into farmland - everywhere from the Midwest to Ukraine to Brazil. Canadian private equity firm AgCapita, which raised $18 million in 2008 to invest in Saskatchewan cropland, estimates that as of the first quarter of 2009, more than $2 billion of private equity money had been raised for farmland investments globally, and another $500 million was planned.

The growing flow of money into farms has persisted despite a major drop in the commodities markets last fall, prompted in part by the global financial crisis. In the spring of 2008 spiking grain prices caused food shortages and rioting in dozens of countries before falling some 50% by December. In fact, that crash has obscured a broader trend. Even after the correction, grain prices remain above their 20-year average, and food stocks around the world are still near 40-year lows. For many investors, last year's shortages are a preview of what could lie ahead.

The fundamentals remain in place for a long-term boom in the prices of everything ag-related. The simplest metric to consider is the amount of farmland per person worldwide: In 1960 there were 1.1 acres of arable farmland per capita globally, according to data from the United Nations. By 2000 that had fallen to 0.6 acre(see chart above, "Precious Acres"). And over the next 40 years the population of the world is projected to grow from 6 billion to 9 billion.

"Land is scarce and will become scarcer as the world has to double food output to satisfy increased demand by 2050," says Joachim von Braun, director general at the International Food Policy Research Institute. "With limited land and water resources, this will automatically lead to increased valuations of productive land. And it goes hand in hand with water. Water scarcity will probably increase even more than land."

Improving diets in the developing world will also help drive up prices. As per capita incomes rise in China, India, and other parts of Asia, hundreds of millions of people will be adding meat to their daily fare. In the coming decades that will have a multiplier effect on demand because of the massive amounts of grain used to feed livestock. The USDA estimates that it takes seven pounds of grain to produce one pound of beef. Even with better crop yields from new seed technology, a supply crunch is looming. And the effects of climate change - rising sea levels, more droughts - could only amplify the problem.

"I'm convinced that farmland is going to be one of the best investments of our time," says commodities guru Jim Rogers, who serves as an adviser to AgCapita. "Eventually, of course, food prices will get high enough that the market probably will be flooded with supply through development of new land or technology or both, and the bull market will end. But that's a long ways away yet."

First Published: June 10, 2009: 9:47 AM ET

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