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Buy land, they’re not making it any more.

Agricultural land image

What is happening to the price of agricultural land? 
The increase in UK agricultural land values over recent years has been well documented. The price of farmland has risen by 200-300 per cent over the past ten years, although that growth rate has
certainly slowed more recently. Average values, however, do not tell the whole story, as there is increasing divergence between the best and worst quality land.

An owner operated poultry farm might suit an experienced investor seeking to generate income, while a tenanted farm may suit a riskaverse institutional investor.

Roland Bull image

Why are corporate investors coming back to the market?
Interest from institutional investors has picked up since the global financial crisis. Tangible assets such as farmland are an attractive alternative to conventional financial investments. The fundamental demand for land and its products remains fairly inelastic through economic cycles making farmland a good diversification asset. As food forms a fundamental part of inflation indices rural land assets can also provide a good hedge against inflation.

Who else is buying?
Demand from farmers seeking to expand their business remains strong, although we may see that part of the market tempered by changes to the terms of borrowing, particularly if commodity prices don’t recover for some time. There is significant interest in the South and South East from those looking to roll over capital gains realised from the sale of development land and those seeking to shelter capital from inheritance tax.

What are buyers looking for?
That depends on the buyer’s motivation for acquiring land. Traditional institutional investors will typically take a long-term view and will often be prepared to accept a low income for many decades if there is a prospect of ultimately delivering significant capital growth from strategic development or tenancy reversion.

The fundamental demand for land and its products remains fairly inelastic through economic cycles making farmland a good diversification asset.

Many investors look to acquire land with good quality productive soils supporting a range of crops, which will remain profitable in the absence of farm subsidies. However, lifestyle buyers who are perhaps less reliant on agricultural income, may seek ‘trophy’ assets as a store of wealth and for the amenity benefits they can offer.

What does a good agri-investment look like?
Again, this depends on an investor’s individual requirements, their appetite for risk, and their time horizons. An owner operated intensive indoor poultry enterprise might suit an experienced private investor seeking to generate income, while a farm subject to a long-term tenancy might be more appropriate for a risk-averse institutional investor.

Does agricultural investment represent a good long-term bet?
Globally, population growth and changing diets are driving demand for agricultural products. In densely populated countries like the UK, other competing demands for land use including housing, recreation, energy generation, employment, and conservation will continue to support the case for investing in land.

What are the main threats currently facing the agricultural industry?
Low commodity prices are probably the most immediate threat to farming businesses. In the medium term though, subsidy reform and interest rate rises pose a significant risk to some operations. In the longer term, we need to see new entrants joining the sector if the ageing farming industry is to remain viable.

How would a Brexit affect the market?
In the short term, a predicted fall in the value of the pound would benefit farmers producing soft commodities, priced by a dollardenominated world market. In the longer term, a Brexit would likely lead to more rapid withdrawal of direct farm subsidies, despite the fact that the UK currency contributes around twice as much to the Common Agricultural Policy as its farmers receive in agricultural subsidies. The rapid loss of subsidies would be catastrophic for some businesses, but in due course could stimulate innovation and drive efficiency.

Labour intensive fruit and horticultural producers in the UK, which rely on European seasonal labour, would suffer from any restrictions placed on free movement.

What about the issue of water – how does it affect agri-investment? 
Water is of course a critical ingredient for agricultural production and the timing of annual rainfall is the principle determinant of yield variability. In many regions of the world, nothing can be produced without access to irrigation. In the UK, irrigation is typically used to enhance the yield and quality of higher value crops and to maintain consistency. Irrigation infrastructure and access to sustainable water sources is likely to become more valuable in future as abstraction becomes more tightly regulated and as the climate changes.

What are the threats for the future?
Agricultural production has got to keep pace with an everincreasing population and productivity gains have been small compared to those seen during the green revolution of the 1960s and 70s.

Continuing to meet demand, with a diminishing land base, will require innovation and new technology. Genetically modified crops could be part of the solution. The industry will also need to adapt to long-term climate change, which may alter growing conditions in parts of the world.

What are the benefits of agricultural investment?
In many underdeveloped regions of the world, responsible investment into the agriculture sector can provide much needed capital to drive productivity growth and create employment. In the UK, the flourishing ‘agri-tech’ sector is reliant on investor capital to fund research and innovation. Bidwells has a long track record of working with investors of all sorts to help make prudent investments and to drive returns.

To an investor there are many potential benefits, not least the opportunity to secure superior risk-adjusted returns and a good hedge.

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