Farmland investment: Stick or twist?

Following several years of strong farmland price growth across the world, data has been trickling through since Q2 that demonstrates how higher interest rates have impacted this upwards surge.

Rural Bank’s May report showed the growth in the median price per hectare for Australian farmland remained bullish in 2022, as prices rose by 20 percent to match the 2021 growth rate, which was something of a surprise as the country seemed to be bucking the average downward global trend. The bank’s mid-year 2023 report, however, shows price growth has now flatlined, increasing by only 0.1 percent so far this year as the new economic climate took its toll.

Data released by Savills in September shows average prices on a global basis had already started to feel the bite in 2022, which recorded an average increase of 3.3 percent, down from an 18 percent average increase in 2021.

Savills also found that as prices in Australasia started to level out and those in Central Asia and Western Europe fell, North America recorded a modest uptick while South American farmland prices continued to rise, supported in no small part by Brazil’s extraordinary 45.2 percent farmland value growth, following a 38 percent average rise in 2021.

“Average farmland values in Brazil have more than doubled in the last three years,” said Savills, which the real estate services company attributed to low interest rates, a weak Brazilian real and high commodity prices.

So, what does this all mean for the farmland investor? Well, depending on the farmland strategy being pursued, it could be time to stick or twist.

For Australia’s Growth Farms, farm profitability’s inability to keep up with land value increases has encouraged the firm to wind up its Australian Agricultural Lease Fund four years early, and bank its gains now.

The World Bank’s October Food Security update shows that on a year-on-year basis, maize and wheat prices were 29 percent and 35 percent lower, respectively. And while the bank expects food prices to fall by 8 percent this year, they will still be at the second-highest level since 1975, demonstrating that farmland assets with a value-added capacity could continue to present a compelling investment opportunity.

It seems reasonable to assume this was part of Fiera Comox’s thinking when the firm pulled the trigger on the acquisition of Spanish extra virgin olive oil producer Innoliva Group in September, which also benefits from the long-term ‘food-as-health’ tailwind.

In the short term, Innoliva may well benefit from the “100 percent surge” in olive oil prices largely brought about by the drought in Spain – the world’s largest producer – which has resulted in production falling from 1,489,351 tonnes of oil last year to 675,093 tonnes in the 2022-23 season, according to CaixaBank.

But there are also long-term gains to be garnered by investors backing the correct commodities and farm businesses today because, as the World Bank data shows, when commodity prices do begin to fall, they will do so from historically high levels.

And with regards to Spain specifically, while drought and high production costs combined to slash yields across the board and led to a year-on-year 9.3 percent fall in exports, the value of those exports was actually up 6.3 percent year-on-year.

Whether investors choose to stick or twist on farmland investments this year, their selection process and experience with the asset class’s peaks and troughs could be all important as all signs no longer point north.