According to the Economist magazine, “in the next 40 years, humans will need to produce more food than they did in the previous 10 000 years put together”.
The Ritesh Anand Column
Over the next decade, we are likely to see a significant increase in the demand for agricultural land especially in Africa where productivity gains can be significant. This presents a tremendous opportunity for many African countries, including Zimbabwe.
Over the last decade, supply of food has failed to keep pace with demand. Economic growth, especially in emerging markets, has led to increased demand for urban land, agricultural productivity gains have declined while demand for bio-fuels has meant food production has failed to keep up with consumption.
Farmers, scientists and entrepreneurs are full of ideas, but they need capital to make it work.
Investors who have historically focused on buying and selling companies are starting to look at opportunities in the agricultural sector.
According to the same magazine, farm gates have traditionally been closed to capital markets: nine-in-10 farms are held by families. But demography is forcing a shift: the average age of farmers in Europe, America and New Zealand is now in the late 50s.
They often have no successor because offspring do not want to farm or cannot afford to buy out family members.
In addition, adopting new technologies and farming at a bigger scale require capital few farmers can afford, even after years of bumper crop prices.
Institutional investors such as pension funds see farmland as an attractive long-term investment opportunity either doing their own deals or outsourcing them to specialist funds. Some act as landlords by buying land and leasing it while others buy plots of low-value land, such as pastures, and upgrade it to high-yielding orchards.
Some investors have focused on high risk and return markets like Brazil, Ukraine and Zambia, where farming techniques are often still underdeveloped and potential productivity gains are significant. The investment thesis is as simple as they come, as Mark Twain realised long ago: “Buy land, they’re not making it any more.”
Farmland has been a great investment over the past 20 years, particularly in America where annual returns of 12% with low volatility were realised. In America and Britain, where tax incentives have distorted the market, it outperformed most major asset classes over the past decade, and with lower volatility.
Optimists argue that increasing demand and shrinking supply as well as urbanisation, poor soil management and pressure on water systems are threats to farmland making them strong investment cases for the asset class.
Capital appreciation and yields are not the only positives that make farming attractive for investors. Faming offers a diversified return stream that is uncorrelated with most other asset classes.
It is uncorrelated with paper assets such as stocks and bonds, has proven relatively resistant to inflation and is less sensitive to economic shocks (people have to eat, even during downturns) and interest rate hikes. Moreover, in the aftermath of the financial crisis, investors gain comfort that they are investing in a tangible asset.
Sophisticated institutional funds like Qatar’s sovereign wealth fund asked Bydand Global Agriculture to buy nearly 50 farms in Australia and merge them into a single investment portfolio in 2009. Terrapin Palisades, a private equity firm, bought a dairy company and some vineyards and tomato fields in California and converted all to grow almonds.
This has proved to be a great investment as prices of almonds rose on the back of an increase in demand in China. Such conversions require upfront capital and the ability to survive without returns for years.
The private equity approach is well suited to investing in farming. Private equity can take the form of simple improvements, such as changing irrigation methods from antiquated dykes and canal networks to automatic spray systems. Modern technology and improved farming methods can lead to a significant improvement in crop yields especially in Africa where capital is scarce.
According to Preqin, a global data provider, there are only 36 agriculture-focused funds, with US$15 billion under management, while there are 144 funds focused on infrastructure (US$89 billion) and 473 targeting real estate (US$163 billion).
Tiaa-Cref, an American financial group, is a market leader with US$5 billion in farmland, from Australia to Brazil and its own agricultural academic centre at the University of Illinois. Even my old shop, the Wellcome Trust, has invested in farmland.
Most investors are put off by the sector’s peculiar risks and complexities. Weather, commodity prices, soil health, water access, dietary fads and animal health are not common skills among pension fund managers. Political risks are high: cash-strapped governments in Europe and America may (belatedly) cut farm subsidies.
In many poor countries, land titles and property rights are not guaranteed — if those countries even allow foreign ownership of land in the first place. This is true for Zimbabwe where all agricultural land belongs to the state.
In order to attract more capital flows, financial managers and farmers will need to learn more from each other. A number of African countries, including Zimbabwe, are well-placed to benefit from the growing interest in farmland. This could provide Zimbabwe with a unique opportunity to become productive once again.
Perhaps the right model is through joint ventures where the interests of the farmers are closely aligned with those of their financiers.
Zimbabwe has fertile soils and sufficient water for irrigation. The recovery of the agricultural sector is critical to the long-term recovery of the economy. Agriculture still forms the backbone of our economy and despite the current excitement in the mining sector, agriculture is key to unlocking value and growth in Zimbabwe.
Government needs to think critically about the right model for developing agriculture in Zimbabwe. Joint ventures with providers of long-term capital could be the key to unlocking growth and restoring Zimbabwe’s rightful place as the breadbasket of Africa.