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The price of agricultural land traditionally moves in a countercyclical way to real estate and some other assets. Furthermore, being driven by fundamentals such as rising populations and increasing demand for food, agricultural land is seen as a safe haven in times of volatility.
In a recent UK market report, Savilles commented:
“Farmland has once again proved resilient to recessionary pressures as in the previous three recessions during the past 30 years. Farmland is also one, along with gold, of the world’s principal defensive hedges and is sought after in times of economic volatility. Although some limited pressure on values was recorded during previous recessions the general upward trend was not stifled. We believe this again will be the case in the current economic climate.”
Demographic pressures
By 2010, the world’s population is estimated to be three times larger than that in 1950, and is forecast to exceed 8.5bn by 2050. Rising personal incomes will mean that a larger proportion of those people will be rich enough to eat meat. Since 7kg of grain in feed are required to produce 1kg of beef, increases in meat production affect grain availability exponentially.
Today, China for example consumes less than 300kg of grain per person annually compared to 900kg in the USA; the number of Chinese rich enough to eat meat is forecast to double by 2020. Similar trends are visible in other nations such as India.
As a result of growing world population and increasing meat consumption, the UN estimates that food demand will double by 2050. Pressure on available land and prices will be enormous. EU land is highly prized due to the security and political stability of the region, and a number of Middle Eastern food funds are already active in Romania.
Environmental changes
Melting icecaps, rising sea levels, increasing droughts, deforestation, expanding deserts, deteriorating quality of farmland and urban sprawl all impact on agricultural productivity. Some experts estimate that droughts previously seen only once a century will occur every ten years in the future. Landslides and floods are expected to become more common. Up to 30 per cent of land is forecast to become unusable due to erosion and over-use; while deteriorating quality results in up to 8m hectares per year going fallow worldwide.
All these factors will reduce the availability and productivity of agricultural land.
Even measures aimed at mitigating climate change (such as the Kyoto Treaty) place pressure on agricultural land prices by demanding large-scale reforestation and carbon management programmes.
Energy security
Alternative energy is firmly on the world agenda. One of the easiest renewable fuels to produce and deliver is bio-ethanol. Today, 30 countries produce significant levels of bio-fuels, and the amount is growing all the time: global production of 7bn gallons in 2007 is expected to exceed 20bn in 2010. The EU plans to fuel 10 per cent of road traffic with bio-fuels by 2020.
Inevitably, the expansion of bio-fuel production reduces the amount of land available for growing other crops, further increasing the price of agricultural land.