WORTH KNOWING
AMERICAN FARMLAND, GLOBAL SHIFTS
Growing populations and nascent middle classes are forcing more countries to increase their grain
imports — and the United States is still a major exporter. Smart investors are taking note.
by Dennis Moon and John L. Taylor, Jr.
U.S. farmland continues to provide the
opportunity for attractive long-term
returns. At the top of our list of reasons,
as always, is the investment category’s
consistent average annual return — about
10% (as a combination of current yield
from crop leases — around 4% and rising
land prices — around 5–6%) over at
least the past two decades. But beyond
those steady past returns, a number of
global factors seem likely to sustain the
investment appeal of the category going
forward. (See Exhibit 3.)
The world’s arable land is basically fixed, but at the same time, the global
population count continues to rise and newly prosperous nations are demanding
more food. Note the following statistics:
• A
rable land worldwide has held steady at about 3.4 billion acres for at least
a decade. (See Exhibit 1.)
• Most of the grain produced in the world today is consumed.1
• T
he global population is now 7 billion and could hit 8 billion in a decade.
(See Exhibit 1.)
• M
iddle classes growing in emerging markets like China are demanding more
and better food.2
• T
he competition for corn continues between ethanol producers and the
food industry.3
• W
ith 12% of the world’s arable land and just 5% of the population, America
is often called “the world’s breadbasket.” For comparison, China has less
farmland (8%) and is four times as crowded (20%).4
We believe these factors combined bode well for investments in American
farm properties.
ABOUT THE AUTHORS
Dennis Moon is head of U.S. Trust’s Specialty Asset
Management group.
John L. Taylor, Jr. is national manager of U.S. Trust’s
Specialty Asset Management Farm & Ranch group.
Investment products:
Are Not FDIC Insured
Are Not Bank Guaranteed
See last page for important information.
May Lose Value
WO R T H KN OWING
|
A M ERIC AN FARMLAND, GLOBAL SHIFTS
ETHANOL 6
EXHIBIT 1: POPULATION AND ARABLE LAND
8
Past: In 2000, the ethanol-as-fuel industry was small.
7
Present: Ethanol manufacturers process about 4 billion bushels
of corn a year.
6
Future: That production level is expected to remain relatively
constant, or grow slightly from this point forward.
5
4
3
GENETICS 7
2
World arable land in acres
2022
2010
2002
1
1992
Billion
3.4
World population
Seeds made hardier or more fruitful by genetic modification
(GM) could improve the global food supply. However yield gains
from GM crops are decreasing, and in some countries there is
resistance to GM crops.
EXHIBIT 2: SUPPLY AND DEMAND OF GRAIN 2011
Sources: World Bank and UN Estimate, Census. Data as of February 2012.
Sources: World Bank and UN Estimate, Census. Data as of February 2012.
900,000
LAND
PEOPLE
On a global basis, almost all of the grain produced today is used,
in food production or elsewhere. (See Exhibit 2.) The United
Nations ascertains, however, that the earth’s population, about 7
billion in 2011, could hit 8 billion by 2022 and 9 billion by 2040.
That clearly means a staggering number of additional mouths to
feed in the years ahead. Even if arable acreage remains stable
or — worse — declines, the pressure on the world’s farmland
will almost certainly grow.
2
700,000
Metric tons
The world’s food-producing land covers about 3.4 billion acres,
an area consistent for at least a decade. (See Exhibit 1.) This
consistency has been preserved by the creation of farmland in
some areas and the loss of it in others. Still, how much longer
that balance can last is unclear. Productive land can be developed
only in certain areas, basically those with sufficient topsoil of
good quality and adequate rainfall. The planet, meanwhile, loses
about 75 million acres of fruitful fields every year.5 This is
a result of desertification (changing weather patterns),
urbanization (millions moving to cities for better pay), and
industrialization (factories producing more goods for the
better-paid).
800,000
600,000
500,000
400,000
300,000
200,000
100,000
Corn
World production
Wheat
Soybean
World consumption
Sources:
of Agriculture
Agriculture(USDA);
(USDA);World
WorldAggregate
AggregateSupply
Supply and
Sources: United
United States
States Department
Department of
Demand
Estimates
(WASDE).
DataData
as ofasFebruary
2012.
and Demand
Estimates
(WASDE).
of February
2012.
WEALTH
America has 12% of the world’s farmland and 5% of the
population. China has less than a tenth of the cropland and is
four times more populous.8
In addition to a growing populace, many emerging markets are
contending with nascent or expanding middle classes. As its
wealth grows, this cohort is demanding more food as well as
more nutrition-rich cuisine such as protein in the form of beef,
pork and poultry. Additionally, it generally takes about 7 pounds
of grain to produce 1 pound of beef.
A ME R I C A N FA R ML A N D , G LO BA L S H I F TS
As a food producer in 2010–2011, U.S. farmers produced 39%
of the world’s total output of corn and provided 55% of all corn
exported worldwide.10 (Notably, some of that was scooped up
by China, a major grain exporter until about 2008.)
The reasons for America’s abundance are many. There are
the (usually) beneficial weather conditions and the American
propensity to develop (in this case, agricultural) technology
that enhances production. Then, of course, there are the nation’s
vast acres of cropland, natural infrastructure such as rivers,
waterways and ports along with its relatively modest population
count. (We have 12% of the world’s arable land and just 5%
of the people.11 Compare this to China’s 5% and 20%,
respectively.11) It’s this ratio that typically leads to a surplus
that can be exported — and to America’s sobriquet as “the
world’s breadbasket.”
INVESTMENT
This abundance has helped investments in farmland produce
an average annual return of about 10%, as a combination of land
appreciation and yield from cash or crop share leases, during
at least the past 20 years. (See Exhibit 3.) We believe the
global conditions we have cited above will almost certainly help
the category continue to produce similar, or possibly higher,
returns for some time to come.
25%
20%
15%
10%
5%
0%
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
In 1980, U.S. farmland cost $750 an acre. As of 2010, it
had risen to $2,250 an acre. Income from major crops has
also increased.9
WO R T H K N OW I N G
EXHIBIT 3: FARMLAND RETURNS — APPRECIATION AND INCOME
1991–2012
Return
BREADBASKET
|
Income
Appreciation
Past performance is no guarantee of future results.
Source: NCREIF.org as of December 31, 2011.
Lastly, we often hear from clients who are interested in investing
in U.S. farms because of the category’s consistent overall yield
and low correlation with the securities markets. Yet they are
hesitant to invest because they say they know nothing about
crop rotation, cattle feed or the like. With the experienced Farm
& Ranch Management team at U.S. Trust, that is not a problem.
Here’s why: You can invest in farmland without knowing a thing
about farming. Our experienced farm managers essentially do
all of the work, from inspecting a farm and conducting due
diligence before a purchase to making sure things run
smoothly afterward.
For more information, contact your U.S. Trust
advisor today.
There are some unknowns, of course. They include the possibility
of widespread crop disease as well as droughts and floods.
We may, in fact, see more unusual weather patterns as climate
change continues. (Still, if the recent drought in the Midwest
is any guide, bad weather can sometimes push up the price
of certain grains — and the value of farm investments.)
3
USDA, Feed Grains Data, February 2012: http://www.ers.usda.gov/data/feedgrains/Table.asp?t=09.
McKinsey Quarterly, McKinsey & Company, July 2010.
3
Biofuels: USDA Agricultural Projections to 2019, February 2010.
4
United Nations, February 2012.
5
“Access to Land and the Right to Food,” United Nations, October 2010.
6
Biofuels: USDA Agricultural Projections to 2019, February 2010.
7
International Service for the Acquisition of Agri-biotech Applications report, February 2011.
8
World Bank, February 2012.
9
USDA, Trends in U.S. Farmland Values and Ownership, February 2012: http://www.ers.usda.gov/Publications/EIB92.
10
U.S. Production: USDA, World Aggregate Supply and Demand Estimates, February 2012.
11
United Nations, February 2012.
1
2
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