CAIA Level II: Advanced Core Topics in Alternative Investments, 2nd Edition

CHAPTER 21

Farmland and Timber Investments*

Institutional investors have recently expressed an increased interest in the returns produced by the direct ownership of real assets, and farmland assets in particular. Global private investment in farmland by financial investors is estimated to be between $10 billion and $25 billion (HighQuest 2010). The rationale for such investment has typically centered around three motivations:

1. Farmland as an inflation hedge. As a real asset that is linked to food and energy production, farmland is expected to be a hedge against inflation. Its supply is largely inelastic (in contrast with fiat currency, securities, etc.), and increasing valuations will lead to relatively marginal increases in supply, further reinforcing its value as an inflation hedge.

2. Farmland as a diversifying source of return. Being a private market investment subject to its own physical and economic dynamics and an asset that is, for the most part, privately held and often indirectly stabilized by government subsidy, farmland's returns are not, in the short run, directly linked to financial markets. Furthermore, farmland is generally a relatively unlevered asset, further disassociating its returns from financial markets.

3. Farmland as asset positioning for a food and energy scarcity theme. Economic and demographic growth is likely to create demand for agricultural products that outstrips current productive capacity, leading to the development of new farmland and price ...