Institutional Investors Betting on Farmland: Here’s Why Their Returns Will Plummet

The Rising Popularity of Agricultural Investments

Though not traditionally seen as a lucrative profession, agriculture has gained popularity as a valuable asset in challenging times.
Investors have been turning to agricultural land as a store of value, especially in the aftermath of the financial crisis and amid the pandemic.

Benefits and Challenges of Agricultural Investments

Wealth managers view agricultural investments as a hedge against inflation, offering portfolio diversification and stable returns.
However, the sector’s safe haven status may be threatened by climate change, which poses both risks and opportunities.

Growth of Agricultural Assets

While agricultural land remains a niche asset class, institutional ownership in the United States has been steadily increasing, reaching $16.6 billion by 2023.
Over the past two decades, global agricultural yields have averaged around 10% annually.

Factors Influencing Agricultural Land Values

According to Knight Frank, the value of agricultural land in the US is closely tied to commodity prices, while other markets are influenced by factors such as tax regulations and subsidy systems.
In the UK, large land parcels are rarely put up for sale, with transactions like a recent £260 million joint venture involving 21,000 acres being a rarity.

Sustainable Practices and Environmental Impact

Adopting regenerative techniques can improve soil fertility and carbon sequestration, reducing agriculture’s environmental footprint.
However, the shift towards carbon-intensive practices like solar panels or tree planting may divert land from agricultural use, adding pressure to meet the projected 50% increase in food production by 2050.

Future Outlook and Investment Considerations

Economist Robert Shiller’s cautionary notes on technological disruptions like lab-grown meat raising concerns about the future value of agricultural land.
Climate change-related challenges such as flooding and droughts could render some lands unsuitable for agriculture, while opening up new opportunities in other regions.
Long-term investors are advised to consider geographic diversification to mitigate risks in agricultural investments.