US farmland significantly outperformed other real assets including timberland and real estate between 1999 and 2013, according to a new investment performance report from UK real estate company Savills.
Data from the National Council of Real Estate Investment Fiduciaries (NCREIF) Farmland Index show that agricultural properties bought as investments over the 15-year period returned 13 percent. Particularly high commodity prices over a 3-year period helped boost the returns, according to Savills.
“US farmland prices, unlike in other parts of the world, are much more related to the commodity prices,” Ian Bailey, director of rural research at the agency told Agri Investor. “UK farmland prices by comparison are more driven by non-farmers buying the land. The trend between commodity prices, productivity and farmland values has been broken over the past 10 years.”
“Non-farmers are buying the land [in the UK] for lifestyle type reasons instead of income returns, or they just want to live in the countryside. But in the US, buyers are buying because of commodity prices,” Bailey continued.
In the US, farmers represented 75 percent of farmland buyers in 2014 as investors accounted for the remainder. But in the UK, farmers bought 45 percent of farmland sales during the year while a combination of institutional/corporate and non-farmer buyers acquired the remainder, according to data compiled by Savills.
In its report, Spotlight: US Farmland 2015, Savills offers an overview of US farm profitability across crop types, average farmland values, asset performance, and policy on overseas ownership of US farmland. It is designed for institutional investors and private individuals that are not familiar with the US agricultural market, but that want to invest in it, John Cottingham, co-author of the report and president of Agricultural Investment Associates (AIA), told Agri Investor.
“The purpose of this report is to highlight the opportunity in the US and to get a lot of investors [to the US market],” Bailey told Agri Investor. Many investors do not usually think about the US as an opportunity, he added.
“[Investing in US farmland] is good for diversifying your portfolio,” he said. “The US is a mature market, it’s politically secure in a lot of ways, which is similar to the UK. Comparing places like Africa or some of the emerging markets, [US] is a very safe place to invest.”
To unlock the full potential of US land capital, there are still many challenges and barriers to overcome, writes Hugh Coghill, director of international land markets of Savills and one of the report’s authors.
“The US farmland market is multi-faceted in terms of enterprise size, soil type, water availability, ownership structure and varying foreign investment policy on a state-by-state basis,” he wrote in the report. “But with the right knowledge and strategy, farmland investors have the ability to acquire assets of significant value and potential.”
It is this market diversity that makes it important for investors to have local knowledge and understanding of the broad market and the different commodities grown across the various states “which many European investors don’t realise”, added Cottingham.
Cottingham is based in Chicago where he provides a personal advisory service to US and international clients, working with their advisors to manage their farmland assets.