Plough shares

The hunt is on. Many institutional investors fear developed-world governments will relieve their enormous debt burdens by allowing inflation to erode the real value of money. Inflation hedges, though, are not found easily. Agricultural property has attractions. But, ownership brings responsibilities, costs, and risks that need close management.

The inflation-adjusted value of American farmland peaked in 1980, according to data from the US Department of Agriculture. The USDA expects a new real peak in 2012. That’s not much in capital appreciation, but the average annual real yield, on current land prices, has been a respectable 2.8 per cent.

US farmland has participated in the last decade’s commodity boom — the real value will have increased at a 4.6 per cent annually from 2002 to 2012, if the USDA’s estimate of a 3.7 per cent real increase in 2012 proves accurate.

Farmland is no free lunch, however. It is an illiquid asset and cash flow is volatile. The inflation-adjusted income in 2004, the best year since 1980, was twice as high as it was just two years earlier. But, by 2006, much of the increase had been wiped away.

Farmers are dependent on the prices of the crop and of inputs, not to mention the weather. Outside investors have to buy wisely and manage well. The talent and tenancy agreements of skilled farmers cannot be taken for granted.

Now may not be the best time to buy into mature agricultural economies. Not only is the price up relative to the past, but it is expensive beside land in less developed countries. Insight Investment, the fund management arm of BNY Mellon, estimates that a hectare of land in the UK or New Zealand is three times the price of US farmland, which, in turn, is twice the price of land in Romania or Brazil.

Divergent land values draw investors, including those at Mellon, to geographical diversification. But, that probably adds to threats posed by red tape, subsidies, taxes and tariffs. Responsible landowners will want to invest in necessities such as irrigation, roads and machinery because they raise the quality and productivity of land. Intervention of this sort, either directly or by proxy, should also neuter concern about absentee landlords. But, the costs could be substantial.

Patience may smooth returns: indeed, it is probably wise to assume that the minimum investment period for farmland is 10 years. And, the potential for inflation protection suggests that long-term savings institutions, such as pension funds, should consider turning at least some of their clients’ cash into plough shares.