Investing in farming and agriculture has traditionally been reserved for the industry professional. The Private investor’s option to take advantage of this sector has only been available through buying into the shares of listed companies in the sector.  Alternatively it was a case of take up the ‘Good-Life’, only a few years ago, so-called lifestyle farmers – City traders and investors who use their wealth to pursue agriculture as a hobby – bought more arable and grazing land than career farmers6.  Agricultural investment has however started to come of age through innovation in the sector that has opened direct farmland purchase to be made available to the smaller, passive investor.

The reasons behind investing in this sector are compelling:

Population Growth: Worldwide population growth is running at approximately 200,000 people per day . All these extra mouths have to be fed for a lifetime. Clearly this will impact the demand side of the equation.

Rising commodity prices: Rising commodity prices are not short-term phenomena.  Except for a brief deflationary blip in 2008 after the collapse of Lehman Brothers, the CRB Index of 17 essential commodities has been rising steadily all decade (see the chart below).

Rising Farmland Prices: Arable land has again become a hot commodity—despite the struggles of the broader real-estate industry. It’s attracting buyers ranging from wealthy individuals and institutional investors to farmers themselves. Many are investing in farmland funds, though some farmers are expanding operations.9This is not though a short term phenomenon. For example, over the 22 years to 2009, capital growth in Farmland in Western Australia increased by an average of between 14 and 16% per annum.

The Western Diet: Changes in diet and demand for protein from countries with growing economies such as China, Brazil and India, is one factor that has contributed to higher demand for grain through increased demand for cattle feed. The extent of this is such that in China  Lifestyle changes such as increased urbanization and sedentism and “Western” diets high in fat and junk food have caused an increase in heart disease, diabetes, cancer and other “lifestyle diseases”.

When assessing your direct, passive investment into farmland, there are a few questions you should ask yourself before you go ahead. Get them wrong and you may find what you had thought was an easy ride, becomes very bumpy indeed. Don’t forget, farming itself is a risky business. There is much that can go wrong, but mitigate the risks well, ensure you are committed for the long haul, and you may reap the rewards.

Geographical location: The pro’s and con’s of location are clearly wide ranging, but also crucial. What you should be looking out for is:  Weather patterns, look longer term, not just recently. Weather is rarely very consistent, so look over long term averages. Infrastructure, how will your product get to market? Will transportation costs impact on your returns? Is there a tried and tested long terms infrastructure in place? Political Stability, how certain are you that country you are producing in will be consistent with its approach to issues such as taxation, exporting and indeed land ownership? Things can change rapidly in less developed nations.

Product: The ability to sell what you rear or grow on your land is clearly the key to success. Food prices may be increasing over the longer term, but it does vary from product to product. It may be sensible to steer clear of any new or fashionable produce in favour of staple products, where there is stable and consistent market, and certainly you should find a commodity where you are able to track the price.

Management: Without experienced and motivation farm managers you are unlikely to succeed. Try to avoid new schemes or projects where the skills of the management team are untried. While they are gaining experience you are the one that will pay the price. Don’t forget that farming has input costs. A good manager will know when to spend your money in order to get the best returns. Also make sure they are properly motivated by sharing in the profits, rather than just being paid a set fee. This will ensure they get the best both for you and for them. Make sure you do your due diligence on the manager. Ask to see his C.V.!

Ownership/Legal system: Easily overlooked, but important. Make sure you use a solicitor that you can trust to make sure you gain proper ownership to your land. NEVER send money directly to a supplier. All direct farming investments should go through an escrow arrangement to ensure you gain the beneficial ownership of your land. Furthermore, what happens if something does go wrong? Do you really want to be fighting a legal battle in a foreign language and in a legal structure that you don’t understand?

All in all, when it comes to green investments, often personal preference overrides many other aspects, including returns. For the investor who likes to get involved, to be able to quickly see the benefits and to literally touch and feel the product, then you’ll struggle to beat installing a solar panel on your roof. However, if you are really interested in sustainable long term returns, and don’t feel the need to walk over your property on a regular basis, then agricultural investment may be the dish of the day.