Arable Land Shortage and the Case for Agriculture and Farmland Investing - Page 2
How to play the Chinese agricultural interest in purchasing farmland as well as the broader macro-economic perspective of shrinking arable farmland globally? Simple economic principles of supply and demand dictate that when there is an increasing shortage of an asset combined with growing demand for it, the prices of that asset are likely to go up. Hence, direct ownership of farmland in locations such as Africa – which is now increasingly possible for individuals – is certainly one option. Sub-Saharan Africa holds 60% of the world’s remaining uncultivated land suitable for farming and has seen a particular surge of interest from both Chinese state owned companies as well as Persian Gulf Sovereign wealth funds, reflecting these nations' concerns for their food security. Private equity and hedge funds are also diversifying into African agricultural farmland investments.
The second option is to own agricultural stocks, especially in the fertilizer sector as fertilizer will be crucial to obtaining the greatest yields from shrinking agricultural land. For example, Yara of Norway (Norway:YAR), which is one of the world’s largest producers of nitrogen fertiliser and has an excellent distribution network. For those interested in organic food, which is increasingly an important sub-sector of agriculture, Cranswick (CWK) of the UK is an excellent fit. Finally, for a broader basket of agriculture stocks there is the Market Vectors Agribusiness ETF from the firm VanEck called MOO. All of these should be accessible by western investors from any online brokerage firm that covers the world’s major stock exchanges.
Finally, the third option is also the option of investing in commodities futures ETFs that track the prices of different commodities in the agriculture sector.which tracks the price of 10 agricultural commodities ranging from wheat and corn to livestock. Again, this ETF trades on a number of global exchanges and should be accessible to anyone with an online brokerage account.
If we had to choose, the purest exposure to the agricultural land theme is farmland investment itself, although many agriculture stocks also capture this trend reasonably well. We are probably somewhat less enamored of the third option as direct commodity prices are increasingly move up and down based on short-term speculation by hedge funds and other large investors, although for those looking for more of a near-term trading option an ETF like UAG is an excellent choice.
Any way one chooses to invest in agriculture, however, will quickly find that upon studying the sector that the shrinkage of cultivatable farmland is a clear global macro-trend worth following.
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