Farmland can offer investors a variety of benefits; it gives direct exposure to the 40 per cent projected increase in food demand expected before the end of the 21^st century, protection against inflation and potential upsides from monetisation of ecosystem services such as carbon sequestration, biodiversity net gain and nutrient neutrality. It is also a scarce resource, with availability per capita globally expected to fall by a third by the end of the century.

At any point in time there is a huge variety of farm types on the market around the world, and the challenge to investors in the asset class is knowing which represent a quality investment.

We’ve created a five-point checklist which can be worked through at the beginning of a potential investment appraisal process.

1. Physical characteristics: does the farm have fertile soils which can produce consistently high crop yields regardless of weather conditions? Are the silt, clay, sand and organic matter proportions appropriate for the crops (or grassland) to be grown? Does the farm have access to water either through irrigation or consistent rainfall? If the farm does have irrigation, has the volume of irrigation water required always been available? Is the irrigation licensed? Does the farm’s topography lend itself to the type of agriculture the investor is seeking exposure to?
2. Location: does the local area have a track record for the type of agriculture the investor is looking for? If not, is there a premium in the forecasted projected returns which reflects this additional risk? Is the farm well-located for access to markets for its end products? Can an investor access qualified management personnel in the local area? If the investor wishes to lease the farm, what is the nature of the potential tenant pool locally?
3. Financial considerations: how consistent have production yields and commodity sale prices been in recent years? What about costs of production? Does the historic data give enough consistency to forecast future farm income generation potential? If the investor wishes to generate an income from leasing the farm, how have market lease rates performed in recent years? How do market lease rates compare with market freehold values? Do market freehold values compare with historic farmer incomes and future earning potential? Is the land fairly priced? What drives its value? How might these drivers change over time?
4. Nature of local networks and presence: it’s vital to have access to local agri-business management who are embedded in the agricultural community particularly as so much of the intelligence around investment risk is held locally. Does the business representing you in the local area have a strong reputation with a long-established presence or is its profile derived from expensive marketing rather than delivery?
5. Who is competing for this property: is this a property which has been advertised worldwide, or has it been sourced off market? A worldwide audience generally is very much to the seller’s benefit, as many potential buyers will be competing, and they may as a result achieve a price much higher than their original aspirations. Off market deals, conducted quickly and with financing ideally in place, can allow investors to achieve a much better price for their land.

Working through this checklist to appraise a potential farmland purchase is an essential element of the due diligence process prior to acquisition.
 

Further information

Contact Jonny Griffiths