Adapted from video above
GLOBAL FOOD SHORTAGE
Today, we are talking about food security, the subject of a worldwide food scarcity, and investments in agricultural acreage.
According to the United Nations, about a billion people went without enough food in 2021 alone.
Additionally, the record-breaking high food prices in 2022 have sparked a global catastrophe that might push millions more people into extreme poverty while accelerating hunger and malnutrition.
People in low- and middle-income countries are more affected by rising food prices than those in high-income countries because they spend a bigger percentage of their income on food.
Let’s first talk about the causes of the current global food crisis.
Resource limitations : Earth’s resources are limited and becoming more so as the world’s population rises, and there is a finite quantity of land available for farming.
Climate Change : The unprecedented drought that has affected most of the Western United States is one example of how climate change is a genuine problem that affects sustainability.
The COVID-19 epidemic : Which has damaged the worldwide supply chain and caused trade disruption in the form of cargo delays due to the closure of major ports, has had an impact on the world economy.
Russia : War in Ukraine has hampered food supply and production.
DRIVERS BEHIND FOOD PRICES
FERTILIZERS
Agriculture input costs, such as those for fertiliser, seed, and chemicals, have risen to all-time highs as a result of the global supply chain disruption.
Due to increasing energy costs, European fertiliser companies are considerably reducing production; a reduction in supply will result in an increase in price.
EXPORT FROM RUSSIA
Russia is first globally in the export of nitrogen fertiliser and second globally in the exports of phosphorus and potassium fertiliser.
Belarus is another significant supplier of fertiliser and is a Russian ally that is also facing Western sanctions.
Additionally, both nations export potash, an agricultural fertiliser, at a rate of over 40% globally.
EXPORT DESTINATIONS
Export destinations include major economies including India, Brazil, China, and the United States. Russia exports the majority of its fertiliser to these countries.
But a lot of developing nations, like Mongolia, Honduras, Cameroon, Ghana, Senegal, and Guatemala, depend to some extent on Russian imports for their fertiliser needs—at least one-fifth of them.
AGRICULTURAL OUTPUT OF GRAINS
One of the most widely utilised crops in the world each year, wheat is used to manufacture a number of culinary items, including bread and pasta.
Russia and Ukraine, the leading two exporters of wheat, are responsible for almost one-third of the world’s supply.
Additionally, Ukraine is a significant exporter of rape-seed oil, sunflower oil, corn, and barley.
As a result of the war, food exports from these two nations have been disrupted, which has caused a considerable decrease in the supply of grains around the world and an increase in food prices.
PRICE OF GRAIN FERTILIZER
Wheat and corn both offered double-digit returns, with wheat reaching values not seen in more than nine years and corn reaching eight-year highs.
Overall, these two grains continued the upward trend in food prices seen in 2021, when the UN Food and Agriculture Organization’s food price index rose by 17.8% overall, reaching a 10-year high.
Grains maintained their consistent track record and recorded their fifth consecutive year of positive returns in a year with overperformers and underperformers.
TRADE RESTRICTIONS
Numerous nations have also implemented trade-related policies in an effort to increase domestic supply and lower costs as a result of the ongoing food scarcity problem.
As of July 15, 18 nations had enacted 27 bans on the export of food, while seven had enacted 11 restrictions.
This makes the problem of the world’s food supply much worse.
HEDGING AGAINST FOOD PRICE INFLATION
Consider making an investment in farmland, a genuine asset that yields commodities like corn and grain.
Farmland has been compared to a gold-like investment since it has a yield and tends to increase in value over time as land becomes more scarce.
It also generates cash flow every year from the sale of its produce.
Globally, food and agribusiness are a $5 trillion industry.
Over half of the planet’s liveable land is devoted to agriculture, and over a billion people are employed globally along the whole value chain of the agricultural industry.
The U.S. Agriculture Department’s data indicates that around 80% of farmland that is rented out is held by investors who do not actively farm.
In less than ten years, billionaires like Bill and Melinda Gates have amassed a total of about 270,000 acres of farmland.
Jeff Bezos, the founder and CEO of Amazon, has recently accumulated 420,000 acres.
The demand for farmland among institutional investors has skyrocketed since the early 2000s.
Less than 20 investment funds focused on farming existed globally in 2005.
Following the 2008–2009 financial crisis, this started to shift as more money started to flow into safe haven investments like farms.
The total number of funds with a focus on farmland had increased to 166 by 2020.
Farmland remained out of reach for individual investors despite this inflow of institutional capital into the sector, due to entry barriers like large check sizes, murky valuations, and a lack of a transparent market.
FARMLAND INVESTMENT PERFORMANCE
According to the USDA, farmland has generated a positive return each year between 1991 and 2020, with an average annual return of 11.5%.
The S&P 500 returned only 8.0%, in contrast.
Farmland significantly outperforms the stock market when risk is taken into account.
With the exception of the Dow Jones REIT Index, it has outperformed all other asset classes throughout that time period, to put that return into context.
Gains in capital plus passive income from recurring rent and crop payments
WHY FARMLAND CAN BE A GOOD INVESTMENT
LAND IS VALUABLE AS POPULATION GROWS
Population growth affects supply and demand, increasing the value of land as more people live there.
RECESSION PROOF CONSUMER STAPLE
Farmlands remained profitable even in the midst of the 2008 financial crisis and the pandemic.
INFLATION PROOF
Farmlands have inelastic demand as everyone needs food as a necessity, inflation will cause a higher income per crop, causing farmland to rise in value.
LOW VOLATILITY
Provides stability for investors especially during adverse market conditions.
Farmland returns have historically had less volatility than most other asset classes.
During the period 2000 – 2018, U.S. farmland returns have experienced a similar level volatility as U.S. 10-year bonds while farmland has historically outperformed 10-year bonds, delivering significantly higher yields.
Farmland returned an average of 11.0% per year between 1992 and 2020. In comparison, the S&P 500 returned only 8.0%.
When considered on a risk-adjusted basis, farmland outperforms the stock market by a wide margin.
CORRELATION AND DIVERSIFICATION
Unfortunately, correlation across asset classes increases during previous economic downturns when investors need the most portfolio protection.
Consider alternative investments like farms that don’t have a strong correlation to other investments during moments of market volatility.
Farmland and agriculture can be a secure method to diversify an investment portfolio because they function relatively independently from other markets.
Farmland returns have been remarkably stable and resilient over the course of the economic cycle.
Only once between 2000 and 2018 did U.S. farmland produce negative quarterly returns.
When the U.S. economy was experiencing significant growth, it increased in value alongside other asset classes and continued to provide profitable returns.
Jessica Sin
SFA Instructor
Professional in Corporate Finance Sector
Worked Previously in Venture Capital Firms
