It has been duly noted time and again that population growth is a key driver in demand for food and other agricultural commodities including feedstock for biofuels and biomass. As demand for commodities grows, and supplies do not increases, prices rise and competition for existing produce increases. This bodes well for those in control of productive agricultural land as not only do incomes from harvesting crops increase, so too do does the capital value of the land on which they are grown.
In this brief article we will look at the facts surrounding population growth and the likely impact on the performance of agriculture investments, with particular bias towards farmland as an alternative investment asset class.
Monday 31st October 2011 marked the birth of Danica May Camacho in the Philippines. At 5.5lbs, Danica May is a tiny person that represents an enormous global milestone as she was chosen by the United Nations to symbolically mark the global population reaching 7 billion people.
In fact, the human population has increased by almost 400% in the past 100 years alone with a net increase of 225,000 new people per day during the last decade. Currently, more than 5% of the total number of people that have ever lived are alive today, and over 1 billion people have been added to the global population in the last 12 years. On current trend, the global population is projected to be roughly 40% higher than today by 2050 (UN Population Division, 2007, UN 2006 population revision).
To put this in perspective, this is the equivalent of adding the total population of Greater London (7,556,900 people) to the world's headcount every month(Wikipedia, 2011).
Whilst a range of scenarios and population forecasts exist, it is widely agreed that growth in demand for grain will double in the run up to 2050 and that the impact on food prices will be substantial (UN Environment Programme Rapid Response Assessment, 2009, The Environmental Food Crisis: The environments role in averting future food crises).
At the same time as demand is increasing, our ability to meet that demand with produce is diminishing every year. Put simply, the vast majority of suitable land is already being cultivated, with very little remaining to expand land under cultivation, and at the same time, soil degradation, urbanisation and water scarcity all combine to prevent further increases in production.
In summary, agriculture investments based on the identification, acquisition and operation of productive agricultural land offers Investors the opportunity to decorrelate a portion of their portfolios from financial markets, and capture both growth and income that is fuelled by undeniable demographic trends rather than the dynamics of financial markets.
David Garner is Partner at DGC Asset Management, an alternative investments boutique specialising in property transactions in the agriculture and renewable energy sectors.