i2live: Surging world population and middle class in emerging countries among major factors that make farmlands an attractive investment; US is best location to invest in farmland due to soil, infrastructure, strong government support, analysts say
January 24, 2013
(Industry Intelligence Inc.)
– A world population poised to reach 9 billion by 2050 along with the doubling of China’s middle class to 700 million people by 2020 are among the major factors that make farmlands an attractive investment, said Marc Schober and Patrick B. Cheney, of Minneapolis-based Colvin & Co. LLP, in an i2live Webinar entitled “Understanding Farmland as an Investment” on Jan. 23.
Regarding the world population, which is now at about 7 billion, “what we have is a bit of a problem in the next 40 years,” said Cheney, an associate with Colvin & Co. who specializes in agricultural and residential real estate.
“You have a population that’s expected to grow by 30%, but the world’s agricultural output must double in that time to meet the growing population and the demand that comes with it.”
Driving that demand is primarily the rapid development of the middle class in emerging markets such as China and India. Cheney noted that China is estimated to see its middle class double to 700 million by 2020, up from 300 million today, which makes up the world’s largest middle class as well as the entire U.S. population.
He cited a United Nations figure that 40% of every incremental dollar earned by the Chinese goes toward food. The shift from a grain-based diet to a meat-based diet would also mean a huge impact for farming because seven pounds of grain is needed to produce one pound of meat, Cheney said, meaning that China will have to rely heavily on imports.
Even though China is the second-largest producer of corn behind the U.S., the nation is still unable to keep up with domestic demand. Having been an exporter, China became an importer of corn in 2010, and its imports will grow rapidly, up to 15 million tonnes by 2014, Cheney said. Moreover, China has made a similar transition in soybeans, becoming the world’s largest importer.
“We feel that the U.S. has not yet comprehended the impact or the amount of corn and soybeans that China may need to import over the next decade,” Cheney said.
Renewable fuel and ethanol is another factor to consider, as corn used for ethanol in the U.S. has surged from about 10% in 2001 to 40% currently. Cheney said 13.5 billion gallons of renewable fuel are currently sourced from corn, but by 2022, that number will only increase slightly to 15 billion gallons. Furthermore, corn produced in the future will more likely be used for human consumption rather than ethanol.
Despite the growing demand for food in the coming decades, Cheney pointed out that farmland is a diminishing resource due to erosion and development. He estimated that only 1.5 billion hectares of a total of 1.8 billion hectares are already in use globally. The remaining 300 million hectares, however, suffer from poor soil and are located thousands of miles from ports.
“To increase output, we have to rely heavily on yield increases,” Cheney said.
He estimated that farmlands have returned roughly 12% annually with a risk of 8%, calling it a long-term, low-risk, moderate-return investment.
The best place to own farmland is the U.S., said Schober, director at Colvin & Co. and editor of Farmland Forecast. He cited the country’s strong property rights, government support (e.g., subsidized crop insurance), infrastructure, transportation and soil, especially in comparison to other countries with farmlands.
As for investing in Canada, Cheney said that the country has positioned itself for great opportunities, especially in the southern plains across Saskatchewan, Manitoba and Alberta, Schober said. While he noted that its soil content is great, it is limited by climate and growing days.
However, farmlands may be less affected by climate or climate change, as seed technology could create drought- and cold-tolerant corn, he said.
The transcript for this webinar will be available on Feb. 4, 2013.
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