SPECIAL FEATURE

 

Agriculture's Greatest Challenge

Growing enough food to feed a hungry world will create new opportunities for America's farmers. But it also means greater volatility and uncertainty for your financial future.

Private land ownership isn't allowed in Ethiopia, so some countries are attempting to sign long-term leases to expand their food production capabilities. Photo: Jim Patrico

A New Land Grab?
For some countries, securing their future food supply means looking beyond their borders.

By Des Keller and Marcia Zarley Taylor

Jeff Conrad has been in the business of farmland investment for more than 20 years, and he's never seen more interest in buying property internationally than now.

"There is definitely a change in the U.S. and elsewhere," says Conrad, the president of Boston-based Hancock Agricultural Investment Group, which purchases and manages farmland in the U.S., Canada and Australia on behalf of institutional investors. It currently has more than $1 billion invested in permanent crops, such as almond groves and major row crops. "We have people calling us out of the blue who want to learn more about our products."

Interest in farmland isn't limited to individuals or institutional investors. Countries like China and some in the Middle East are purchasing or leasing large tracts of land in Africa, Australia or South America. The reason? With little arable farmland and limited land resources to expand agricultural production, they are seeking to secure access to crops in the future.

"The primary concerns of the funds from the Middle East," Conrad says, "is food security. That is my sense of their No. 1 concern."

Land lovers. The world demand for farmland is further encouraged when you consider today's existing global "fundamentals," such as rising commodity prices and economic development around the world, Conrad says. The establishment of burgeoning middle classes in China and India—with increased demand for grain and meat—are further driving the interest in land.

A World Bank report, "Rising Global Interest in Farmland," released last year, showed international farm sales totaling 111 million acres (about 45 million hectares) in 2009. Prior to that, the average rate of international sales was about 9.9 million acres annually.



As the old saying goes: Land, they aren't making any more of it. Of the world's total land area, about 10% is arable. Of that total, permanent crops like fruit trees make up 1%; meadows and pastures, 24%; forest and woodland, 31%. The remaining 34% is land surface that supports little or no vegetation.

"There are just not a lot of places that have the potential to provide a lot more corn, unless you're willing to cut down all the rain forests," says Ken Cassman, director of the Nebraska Center for Energy Sciences Research at the University of Nebraska. "Argentina has some (potential expansion areas)."

To meet the world's food and biofuel demand over the next 40 years, "we're not going to get there by moving marginal land with low yields into production," Cassman says.

According to a 2009 report by the United Nations Food and Agriculture Organization, 90% of the growth in crop production globally (80% in developing countries) is expected to come from higher yields and increased cropping intensity. The remainder will come from land expansion. Arable land will likely expand by 70 million hectares (173 million acres). That is 5% of total arable land. The expansion will be the result of developing countries adding 120 million hectares, while 50 million hectares would be lost in developed countries.

Hot markets. There are few sources of comprehensive data on international land purchases or leases. However, there are plenty of anecdotes:

In June, China's largest farming company signed a joint venture with Argentina's Cresud to buy land and grow soybeans. The Chinese firm Heilongjiang Beidahuang Nongken Group now farms 5 million acres outside China.

In 2009, Saudia Arabia sought to secure production on 1.2 million acres in Tanzania.
United Arab Emirates, along with private entities, is already responsible for production from more than 800,000 acres in Pakistan.

South Korea is growing mainly wheat on 1.7 million acres leased in Sudan. The deal was finalized in 2008.



China, alone, is expected to buy up to 200,000 acres in Russia, Australia, Argentina and several other countries this year. The Chinese have mostly purchased land in Australia, while in Brazil and Argentina, they generally lease land.

Not for sale. Not surprisingly, foreign ownership or control of large tracts of land is not without controversy. In Australia, the president of the National Farmers' Federation recently warned there is potential for foreign state-owned enterprises to undercut Australian farmers by using their land acquisitions to ship produce back to feed their home populations.

Since August 2010 in Brazil, foreigners have been restricted to buying lots of up to only 5,000 hectares (12,350 acres) and can't own more than 10% of any municipality. That law may change next year as Brazil was preparing to consider lifting those restrictions to continue the pace of outside investment fueling the country's agricultural growth. Brazil is one of the last major agricultural powers to have an abundance of cheap available land.

India, along with China and Saudi Arabia, is taking some heat for leasing tracts of land in Africa for what are considered undervalued prices. Activists in Ethiopia, for example, charge that Indian companies have made secret, long-term deals with their corrupt government for up to 99 years. Private land ownership in Ethiopia is illegal. 

In Africa, "The speed of change in agricultural investment is astonishing," says Doug DeVries, John Deere senior vice president for global marketing. "A lot of land there has good soil and water, and the capability to produce."

Certainly there is foreign interest in investing in U.S. farmland. But foreign ownership barely makes a dent in total acres. In 2009 (the latest year figures are available), 22.2 million acres, or 1.7% of all private agricultural land in the U.S., was foreign-owned. That's up 1.3 million acres from 2008 and up 7.4 million acres from 2004. 

The breakdown of the foreign-owned acres in the U.S.: 59% forest, 14% cropland, 27% pasture and other.

Canadians own 34% of the foreign-owned acres, and the countries of Netherlands, UK and Germany, combined, own another 30%.

Foreign investors in property here are subject to the Foreign Investment in Real Property Tax Act. This tax, which was enacted in 1981, essentially takes the place of capital gains tax for non-U.S. purchasers of property. This tax is a deterrent to some foreign investment in U.S. farmland, Conrad explains.

High land prices and tax laws don't dissuade everyone, however. At the Global Ag Investing Conference last spring in New York, sponsored by HighQuest Partners, half the investors (many of them U.S.-based) surveyed said they planned to focus primarily on the U.S. Another 31% said they were concentrating in South America.

In the U.S., average annual total return (income and appreciation) on farmland has been 13.95% the past 10 years and 10.94% during the past 20 years, according to the National Council of Real Estate Investment Fiduciaries.

Managers at the investing conference reported one country's government employee pension fund is allotting $2 billion for agriculture investments, and could go up to $5 billion. One Danish nurses' pension is targeting farmland in emerging markets, starting with a $370 million stake.

This wave of interest really churned up in 2008, Conrad continues, when some worldwide food prices spiked, food shortages occurred, and the world's general economy was tanking.

"Everything went south, and farmland just continued to perform," Conrad says. "We'd been selling that notion of steady performance for years, but in 2008, people really saw it."