The underlying fundamentals for agribusiness remain unchanged – an expanding global population, a drastic shift towards protein-intensive diets in emerging economies and the increasing popularity of healthy food produced in a resource-efficient way.
After almost a decade of impressive growth, with soaring prices and rising demand for food-based commodities around the world, agribusiness and farmland retains its incredible potential for profitable growth even during times of volatility and uncertainty in global financial markets. Why? Agriculture faces a significant global challenge that requires constant attention – feeding the 10 billion people expected on Earth by 2050 with steadying crop yields and very limited reserves of arable farmland. This places a vast premium on businesses that drive innovation and development in the sector.
Agriculture and commodities are often seen as the cornerstone of future prospects for the global economy. Although the past two years have seen heavy supply, more cautious consumption forecasts and lower prices for commodities when compared with longer-term averages, many experts believe this to be a temporary effect of the global economy adjusting to new circumstances. From lower demand in China to the pressures of cheaper oil, these challenges are being overcome across the board. After all, the Chinese economy remains a subject of envy around the world with McKinsey expecting the country to register a $15 trillion GDP by 2030. Prospects for oil are also moving in the right direction as the market experiences a rebound from $28.94 per barrel seen in January 2016 to $50.25 per barrel today.
An entirely new global consumption challenge is on the cards with impressive population growth and a drastic shift towards more protein-intensive diets across emerging markets. Over the last quarter century a shift in demographics led to one of the largest commodity booms of recent memory. That will pale in comparison to what is expected to occur in the coming decades. The Food and Agriculture Organization (FAO) believe that a 70% expansion in global food production will be needed by 2050, while additional research suggests this will be responsible for a 60% price increase over the same period in food commodity staples.
Farmland values are also expected to remain strong in the long-term as global food demand increases alongside population growth and farmland availability remains constrained by finite resources and a damaged ecosystem. Improved productivity from sustainable agriculture and higher demand leads to increased returns and hence higher values for existing farmland. These values have already appreciated rapidly over the last decade, particularly across the world’s largest agricultural suppliers such as the United States, Brazil and Australia. Saville’s Global Farmland Index recorded an average annualized growth of 14.8% since 2002 and 6.6% over the past five years. In Brazil, farmland values have risen by 58% over the last three years.
This has led to a considerable increase in global agricultural investments. Alternatives such as agriculture are forecast to contribute up to 40% of revenues for the global asset management industry by 2020, despite of comprising just 15% ($14.7 trillion) of total investment industry assets. Even governments are getting involved. According to the Organization for Economic Cooperation and Development (OECD), the world’s 49 main developed and emerging governments spent a combined annual average of $601 billion on agricultural support and innovation projects during 2012-2015.
An increasingly attractive alternative asset class, farmland has historically provided risk-adjusted returns better than conventional real estate and equity investments – representing a hedge against inflation and recession while offering long-term stability and portfolio diversification. With land and other agricultural resources under pressure, we are rediscovering the critical importance of agriculture by focusing on projects that improve soil fertility, combat crop disease and increase yields, all to solve one of mankind’s most significant challenges – feeding the extra 2 billion people expected on Earth by 2050.