The outlook for investment in farmland is “compelling,” according to one fund manager, adding to comments from Warren Buffett that he believes productive assets will outperform unproductive assets - such as gold and government bonds - over the next century.  

With gold prices averaging annual increases of 17.7 per cent in US dollar terms in the period 2003 to date, some last year, including Wells Fargo, in which Buffett’s company has an ownership interest, warned it was in “bubble territory.”

Coupled with these price rises, which are linked to fears over the stability of the global monetary and financial system, ongoing global demographic shifts have sparked a debate over productive versus “unproductive” (store of value) assets.

Notable demographic trends include the rise of the world’s population to over 7 billion and the expansion of the global middle class, expected to hit 1.2 billion in 2030, up from 430 million in 2000 (a rise to 16.1 per cent of the global population from 7.6 per cent). According to predictions from the Global Harvest Initiative, the global population explosion means that in the next 50 years agriculture will be called to produce more food than in the previous 10,000.

In his annual letter to shareholders, Buffett says that for the price of the world’s gold stock an investor could buy “all US cropland (400 million acres with output of about $200 billion annually), plus 16 Exxon Mobils (the world’s most profitable company, one earning more than $40 billion annually),” and still have around $1 trillion left.

In the letter, he argues for investment in “productive assets” – such as businesses, farms, or real estate – that can retain their purchasing power in inflationary times while requiring minimum capital investment.

Others have added their voices to the call for investment in farmland, as well as the agricultural sector more generally, such as through equity investment.

The outlook for long-term growth in the capital value of farmland is underpinned by a “broad range of demographic, economic and legislative trends,” said Martin Robinson, chairman of Brooks Macdonald Funds, in an investment note. He goes on to highlight the opportunities in the UK in particular. 

Against this backdrop, some investment managers, such as James Govan, co-manager of the Baring Global Agriculture Fund, are urging investors to look to agricultural sectors such as fertilizers, seeds, crop protection and machinery for gains in both the short and long term.

“In the short term, we anticipate strong demand for fertilizer and high-quality seeds in the northern hemisphere spring planting season, given the compelling farmer economics and incentive to optimize output. In particular, nitrogen-based fertilizer producers in the US, many of which are located in the ‘corn belt’, with cheap input costs in the form of low US natural gas prices, offer excellent investment opportunities,” said Govan in a statement.

“On the machinery side, farmer equipment is closely correlated to farmer profitability and demand for agricultural equipment in North America and Western Europe is likely to remain at high levels due to strong farm cash receipts, with positive implications for companies such as US-based Deere & Co,” he added.