Danish farmers, hedge-fund managers and investment bankers “all want a piece of the rich soil of England”, says James Rossiter in The Times. The result is a boom in the price of farmland, which rose by a record 27.9% in the second half of 2007 and is up 56% since the end of 2004.
According to the Royal Institution of Chartered Surveyors (RICS), arable land hit a record average price of £10,949 per hectare in the second half. It’s the first time the £10,000 level has been breached in the 13-year history of the survey. As a RICS spokeswoman observed: “Rising commodity prices have resulted in a bit of a feeding frenzy for farmland.”
Higher food prices are encouraging existing farms to expand production and British farmers “surged back into the land market last year”, rivalling Irish and Danish buyers, “for whom land in Britain is cheap”, says Charles Clover in The Daily Telegraph. Adding to the boom has been demand from “City slickers who buy up swathes of countryside”, says Daniel Thomas in the FT. Although individual farmers account for around 50% of land purchases, non-farmers are not too far behind in making up about 37%.
Rising prices have also fuelled pure investment demand. US money manager Black Rock set up a London-based agricultural hedge fund last October, with assets of $253m to invest in commodities, equities and farmland. Other entrants include Cheshire-based residential property group Braemar, which is raising £20m to invest in British farmland on the behalf of clients nervous about the direction of the UK property market. Despite the weak housing market, 60% of surveyors expect prices to keep rising in 2008, at an average annual rate of 10%.
But this may well be overly optimistic. The RICS survey also reports that demand from the so-called “lifestyle buyers” is now on the wane as the credit crunch takes its toll on the City and bonus payouts. High prices are also putting buyers off. As RICS points out, “the residential sector’s fortunes (are) tied more closely with the credit crunch than with world commodity markets”. After all, if you’re not going to farm the land, the price of grain means nothing to you – other than that your morning toast will cost more. RICS also points out that the supply of farmland – usually fairly tight – may grow in the first quarter of this year, as landowners rush to sell ahead of potential capital-gains tax changes in April.
With extra supply coming on line, and lifestyle buyers pulling out of the market, it looks like 2008 will be a much tougher year for farmland than is currently anticipated. All of which suggests that investors who want to take advantage of the boom in softs would be far better off directing their money towards exchange-traded commodities (ETCs) than arable land.
The price of wheat, the UK’s biggest cereal crop, has nearly doubled in the past year and barley is up 80%, says Beth Carney in The Wall Street Journal, while Morgan Stanley’s analysts predicted in a recent note that agricultural commodities are likely to be “the most recession-proof of all asset classes” this year.
ETF Securities offer a wide range of ETCs, including several that give exposure to a wide range of soft commodities. A few funds are also available which invest strictly in softs, says Ellen Kelleher in the FT. They include Schroders’ $3bn Alternative Solutions Agricultural Fund (tel. 0800-718 777), which tracks 42 soft commodities futures and focuses on grains, corn and oil seed.