Food Prices and Farmland Values

The value of any investment asset, from equities to fine wines, commodities to real estate, the value of agricultural land is driven by the relationship between supply and demand. The supply of farmland can be measured on a macro basis as the amount of productive and cultivated land per person on the plant, whilst demand can be measured taking overall population numbers and average calories consumption. There are of course other factors at play influencing farmland values on a local, regional and global basis, including the availability of the capital that enables demand. Follow the link for Food Warren Mi:

Whilst immediate market variables influence land values in the short-term, long-term value is driven by shifts in supply and demand fundamentals. Recently retired legendary investor George Soros has said that he is “convinced farmland is going to be one of the best investments of our time”. Indeed, in the words of the father of modern day value investing; Warren Buffet: “In the short-term, the market is a voting machine, in the long-term the market is a weighing machine”. Buffet’s first ever investment was in 40 acres of farmland in Nebraska, paid for with $1,200 saved from two paper rounds, and rented to a local farmer.

The current value of any income generating asset such as farmland can be effectively measured as a multiple of net income, and adjusted for variability (risk). The greater net revenue any asset generates, the greater the value of that asset. Higher farming incomes mean higher rents and higher sale values as the land from which the income is derived is more valuable. For example, farmland generating a net annual income of $400 per hectare may be worth between $4,000 and $8,000, as this pricing level delivers a net yield of between 5 per cent and 10 per cent after costs. Other local factors also influence farmland values such as political risk, yield (income) variability, operational costs and taxes, with higher risk enterprises requiring a lower pricing point to attract investment in light of the added risk.


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