An article in The Economist remembers the words of Mark Twain when he wrote, “Buy land, they’re not making it any more.” More and more investors are looking to make a buck by investing in farmland, but what will happen if all of that land is at the whims of Wall Street?
From the article:
Farmland has been a great investment over the past 20 years, certainly in America, where annual returns of 12% caused some to dub it “gold with a coupon”. In America and Britain, where tax incentives have distorted the market, it outperformed most major asset classes over the past decade, and with low volatility to boot (see chart). Those going against the grain warn of a land-price bubble. Believers argue that increasing demand and shrinking supply—as well as urbanisation, poor soil management and pressure on water systems that are threats to farmland—mean the investment case is on solid ground.
It is not just the asset appreciation and yields that attract outside capital, says Bruce Sherrick of the University of Illinois at Urbana-Champaign: as important is the diversification to portfolios that farmland offers. It is uncorrelated with paper assets such as stocks and bonds, has proven relatively resistant to inflation, and is less sensitive to economic shocks (people continue to eat even during downturns) and to interest-rate hikes. Moreover, in the aftermath of the financial crisis investors are reassured by assets they can touch and sniff.