Nov 16, 2011, 03.00 PM | Source: Reuters
More precious than gold? Farmland has glowing appeal
REUTERS - Where there's muck, there's money, the old expression goes.
With 7 billion people now needing food on this planet, putting your money into soil and agriculture might be a long-term investment to consider. You'd certainly be in good company: In recent years, high-profile investors such as Jim Rogers and George Soros have made investments in farmland (click http://link.reuters.com/ham94s).
What makes farm property attractive? It has a finite supply and may become even scarcer with global warming, desertification and development. And with a rising population, more tillable land will be needed.
Moreover, it could be a way to diversify your portfolio away from financial markets wracked by global debt fears. Gold has been one alternative, but farmland could be a better long-term bet. Unlike precious metals, you can rent it out and use it to grow crops or feed livestock.
Although depressed somewhat by the economy's recent weakness, U.S. agricultural real estate prices have climbed 40 percent since 2004, according to the U.S. Department of Agriculture (see http://www.frbkc.org/publicat/mse/mse_0111.pdf).
Recent spikes in commodity prices have given a new lift to farm prices. Interest rates have also been relatively low, which tends to boost most commodity prices. And when there are weather-linked problems in major agricultural zones such as the American Midwest or Russia's grain belt, supply-related price increases often follow.
Buying individual parcels of prime agricultural land is difficult for most people. You have to know how productive that land has been, the cost per acre and the equivalent cost to rent it out. History offers a plethora of boom and bust cycles, and land owners need to be long-term investors to hang on through the dips.
For most investors, funds that invest in agricultural commodities and the farm business funds are a good way to get limited exposure and liquid enough to sell easily. They do not give a perfect correlation to land prices, but they do tend to shadow farmland prices. These exchange-traded funds (ETFs) can help you make targeted investments in agriculture and related industries, and with a relatively small investment.
The funds do not invest directly in farmland, but they offer a way to put some agri-dollars into diversified portfolios. Here are a few:
-- Market Vectors Agribusiness ETF . This exchange-traded fund invests in a basket of companies that derive at least 50 percent of their business from agriculture.
-- PowerShares DB Agriculture ETF. By investing in an index that reflects the performance of agricultural commodities -- and futures contracts that represent them -- you can diversify your portfolio with this fund. The farm economy, of course, directly tracks the prices of key commodities.
-- Global X Farming ETF.This fund follows the price and yield of a farming index. It is based on performance of a diverse list of global companies in farming and farm products.
There's always a solid reason to be cautious with these sector-oriented ETFs. They are subject to stock, interest-rate, commodity, country and now climate-change risk. If interest rates rise, commodities can move in the opposite direction. Land prices can easily crash without any warning and sometimes for reasons related more to finance and cash availability than crop prices.
You also need to be aware that the more investors who buy into agriculture, the greater likelihood that a price bubble will form. Midwestern cropland values soared some 20 percent in the fourth quarter of 2010 alone, reports the Kansas City Federal Reserve Bank (click http://www.frbkc.org/publications/research/mse/). Lofty returns tend to attract more investors hoping to reap similar performance. In a short period of time, these badly kept secrets feed speculative buying.
Even though farmland is becoming more valuable, you shouldn't confuse investing in it with owning a government bond. The only thing guaranteed in agriculture is uncertainty and volatility.
The author is a Reuters contributor. The opinions expressed are his own.
(Editing by Richard Satran, Lauren Young and Beth Gladstone)