FUNDS: Up on the farm

By bne IntelliNews October 25, 2010

Nicholas Watson in Prague -

Over the last decade, farmland has been second only to gold in the list of best-performing assets. And with more droughts like one in Russia this summer and a continuation of the trends that are pushing the world toward a new food crisis, agriculture could well take the top spot over the next 10 years.

This past year has been characterised by droughts in two of the world's major food producing nations. A savage drought in Argentina reduced last year's crop harvest (in December 2009 and January) to the smallest in about a century, while in the first eight months of this year, beef exports fell 51% from the year-earlier period. This summer's drought and wildfires in Russia were if anything even more dramatic. On October 12, the Russian Agriculture Ministry said 13.3m hectares (ha) of the country's grain crop has been destroyed, about a third of the expected harvest, rather than the 10.8m ha previously predicted.

The Kremlin consequently slapped a ban on grain exports, with Ukraine following suit, which has prompted large wheat importers like Egypt, Tunisia, Algeria and Jordan to buy up extra wheat on the spot market, triggering a sharp rise in world grain prices. Wheat futures for December delivery were trading at around $7 a bushel mid-October, which is up about 46% since the end of June.

All this is reminiscent of 2007-08 when spiralling wheat prices prompted food riots in developing countries across the globe. However, traders say this spike is temporary and prices are already sliding back on signs that beneficial weather will boost the winter harvests; prices now are still more than 40% less than those record highs hit a few years ago and food stocks were at a seven-year high at the beginning of the year after bumper harvests last year.

But while this short-term panic will no doubt fade, the longer-term trends of a global food crunch remain intact. "Part of the investment case for agriculture is the really strong supply and demand backdrop," says Coast Sullenger, managing director of GAIA Capital Advisors, which runs the GAIA World Agri Fund (up around 18% since the start of the year as of September 30).

According to estimates from the UN's Food and Agriculture Organization (FAO), the world will need to produce 70% more food by 2050 as the population rises by 2.3bn people, at the same time as diets and the climate are changing.

How can world meet the new demand? Two ways: either increase the amount of arable land or increase the efficiency of that arable land.

Land grab

There is some space for the former. The FAO and the European Bank for Reconstruction and Development (EBRD), which in mid-October hosted a meeting in Istanbul on food security, estimate that in Kazakhstan, Russia and Ukraine alone around 13m ha of land could be returned to agricultural production with no major environmental cost. "The countries of Central and Eastern Europe and Central Asia have vast untapped agricultural resources and can play a vital role in improving world food security," says Anthony Williams of the EBRD.

However, the amount of extra arable land in the world that can be put into production is reckoned to be only another 3%, something that is illustrated by the fact that over the last 50 years the annual growth of harvested hectares has been less than 1%. It's this reality that has pushed countries from Asia, particularly China, and the Middle East to embark upon a fresh land grab. According to a new study by the World Bank, large-scale farmland deals amounting to 45m hectares were carried out in 2009 alone.

Ironically, at the same time as some of those countries are buying up foreign land, they are reducing the amount of arable land at home. China's government recently said it plans to boost annual grain output to more than 550m tonnes by 2020, an increase of 50m tonnes over 2007. However, the amount of cultivable land in the country sharply decreased from 130m ha in 1996 to 122m ha in 2008 due to rapid urbanisation and natural disasters.

Much of the rest of gains will have to come from technology via a new so-called "Green Revolution," the post-war technological improvements in agriculture practices that allowed food production per hectare to grow an annual 3% over the same period when the annual growth of land under cultivation was under 1%.

But the challenge going forward, says Sullenger, is that much of the easy gains in this area have already been made. "It's easier to increase output per hectare from a low base, but you can only increase the amount so much before you have diminishing returns."

GAIA and others see the most leverage for investment returns coming from emerging market regions like Brazil, Russia, Ukraine and Kazakhstan due to low valuations, low costs of production and low land values. In Argentina, the cost of farmland is about $8,000 per hectare, whereas in Russia it's less than $800. "The [former Soviet] region has huge land reserves and enormous potential to increase yields substantially," says Charles Riemenschneider, director of the FAO's Investment Centre. "At the beginning of economic transition, there was an initial sharp drop in production, but since then we have seen slow, but steady progress."

Related Articles

Drum rolls in the great disappearing act of Russia's banks

Jason Corcoran in Moscow - Russian banks are disappearing at the fastest rate ever as the country's deepening recession makes it easier for the central bank to expose money laundering, dodgy lending ... more

Kremlin: No evidence in Olympic doping allegations against Russia

bne IntelliNews - The Kremlin supported by national sports authorities has brushed aside "groundless" allegations of a mass doping scam involving Russian athletes after the World Anti-Doping Agency ... more

PROFILE: Day of reckoning comes for eccentric owner of Russian bank Uralsib

Jason Corcoran in Moscow - Revelations and mysticism may have been the stock-in-trade of Nikolai Tsvetkov’s management style, but ultimately they didn’t help him to hold on to his ... more

Register here to continue reading this article and 2 more for free or 12 months full access inc. Magazine and Weekly Newspaper for just $119/year.

If you have already registered, enter the information below with the same email you used previously and you will be granted immediate access.

IntelliNews Pro subscribers click here

Thank you. Please complete your registration by confirming your email address. A confirmation email has been sent to the email address you provided.

Thank you for purchasing a bne IntelliNews subscription. We look forward to serving you as one of our paid subscribers. An email confirmation will be sent to the email address you have provided.

To continue viewing our content you need to complete the registration process.

Please look for an email that was sent to with the subject line "Confirmation bne IntelliNews access". This email will have instructions on how to complete registration process. Please check in your "Junk" folder in case this communication was misdirected in your email system.

If you have any questions please contact us at

Subscribe to bne IntelliNews website and magazine

Subscribe to bne IntelliNews website and monthly magazine, the leading source of business, economic and financial news and commentary in emerging markets.

Your subscription includes:
  • Full access to the bne content daily news and features on the website
  • Newsletters direct to your mailbox
  • Print and digital subscription to the monthly bne magazine
  • Digital subscription to the weekly bne newspaper

IntelliNews Pro subscribers click here

bne IntelliNews
$119 per year

All prices are in US dollars net of applicable taxes.

If you have any questions please contact us at

Register for free to read bne IntelliNews Magazine. You'll receive a free digital subscription.

If you have already registered, enter the information below with the same email you used previously and you will be granted immediate access.

Thank you. Please complete your registration by confirming your email address. The confirmation email has been sent to the email address you provided.

IntelliNews Pro offers daily news updates delivered to your inbox and in-depth data reports.
Get the emerging markets newswire that financial professionals trust.

"No day starts for my team without IntelliNews Pro" — UBS

Thank-you for requesting an IntelliNews Pro trial. Our team will be in contact with you shortly.