As the global economy remains unsettled, investors are turning to less cyclical assets, such as soft commodities. The increased demand for food, particularly from developing countries where wealth and subsequently the desire for a better standard of living are both rising, has resulted in a significant gap between the supply and demand for food.
Agricultural land is, however, a diminishing resource, especially in the more developed countries where cities are rapidly expanding. Every minute, in the US alone, two acres of farmland is being taken out of production and turned to other uses, mostly for development (American Farmland Trust, 2008). Furthermore, some 12.3million to 19.7million acres of farmland, out of a worldwide total of 3.7billion acres, falls fallow every year because of deteriorating quality (Bloomberg, February 2007).
It is this inability to meet demand that has resulted in increased food prices, strengthening the soft commodities market – despite being in a global recession. Many believe that this will hold up across the next decade. World wheat output is projected to rise by 1.3% per annum, to 679million tonnes by 2010
(Financial Times Markets Data, March 2009).
Wheat price in June 2009 is US$247 per metric tonne, and is projected to grow to US$17.45 per metric tonne each year(CBOT, 2009) . Other crops such as barley, maize and sunflower are also flourishing on the soft commodities market.
In order to meet demand and capitalise on high market prices, less developed economies, such as Ukraine, are improving farming practices to increase their output. In turn, the productivity gap is closing. This is known as the ‘catch-up’ effect, and Ukraine’s harvest yield (metric tonne per hectare) is expected to grow from 3.5 to a massive 8 in the next 5 years (USDA, 2009).
Agricultural land investment provides two forms of income - yield on the crops grown on the land, and growth from the underlying asset.
