Farmland Investments Set to Profit as Wheat Prices Soar
As we discussed in previous articles here and here, we believe the case for investing in farmland - and certainly the agriculture sector more broadly - is extremely compelling. Large investors from Jim Rogers to the massive American pension fund TIAA-CREF are allocating investments to the farmland asset class.
Now, we have just seen a further indication of the long-term trend upwards in the price of agricultural commodities, as the price of wheat soared 17% in one week as a result of ongoing drought problems in Russia and Ukraine. Interestingly enough, this reminded us of a very interesting prediction at the end of 2011 by Saxo Bank. Saxo Bank is a bank based in Copenhagen, Denmark, and at the beginning of each new year Saxo makes public a list of they call "Outrageous Predictions." For 2012, one of their "outrageous predictions" was that the price of wheat would double this year. Whilst initially paying this no heed, it suddenly seems like this is a prediction - however unlikely still to occur - that should be on investors' radar screens.
Unfortunately for global consumers, wheat is no ordinary commodity. It is the core ingredient in bread, the most critical food on the planet, especially in poorer developing countries such as India. Not surprisingly, the amount of farmland used for growing wheat is greater than for any other food crop, and the global trading market for wheat is greater than for all other crops combined. It is no wonder then that wheat is frequently referred to as the “staff of life”.
According to the United Nations’ Food and Agriculture Organization (FAO), the price of the FAO’s cereal index – of which wheat is the core component – has more than doubled since 2005 from 104 to 224. Furthermore, as the global populations moves inexorably upwards towards 9 billion people by 2050 (it just passed seven billion) wheat will become an even more critical staple of the human diet. According to the FAO, whilst the global population increases by approximately 1.5 percent per year, wheat yields – defined as the amount of wheat grain produced per hectare of farmland – is now growing less than 1 percent per year.Continued on the next page