From Scarcity to Security - Farmland Market Review
Date of Article
Dec 20 2011

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The farmland market has witnessed another year of strong growth, in the region of 5 per cent , in line with our previous forecasts.  The asset class’s perception as a safe haven has reinforced demand and rising cereal prices have maintained the “feel good” factor evident across the market over last year.

In order to identify the key drivers behind the phenomenal growth since 2000 we investigated the correlation between agricultural land with oil and cereal prices. Whilst all three commodities witnessed a stable period between 2000 and 2003, heavily influenced by the difficult wider economic climate, oil prices started to rise sharply to a peak in 2008. Cereal prices followed suit to spike in 2008 and both then dissipated as quickly as they rose, highlighting the direct relationship between fuel and food and the dramatic way in which the two products are affected by global demands. Both commodities have witnessed relatively sharp price increases over the last year driven by supply and demand fundamentals and the ongoing unrest in Libya. However, if cereal surpluses become evident as a result of this year’s surprisingly healthy harvest, prices may well fall back to long-term average levels over the next 12 months.

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In contrast, agricultural land has shown a more consistent and measured increase in value since 2000. Our 2010 forecasts identified that the scarcity of land openly marketed was the key driver of price increases last year.  This year, it is the security of the asset class which is proving an increasingly significant factor in demand as the spectre of recession and sovereign debt continues.

In terms of forecasts, demand for prime land is predicted to hold firm with values remaining at 2011 levels.  However, secondary quality land is expected to catch a chill from the increasingly turbulent cross currents from Europe. Land cannot be deemed immune from the wider economic climate and whilst average prices on a national scale are not expected to fall more than 5 per cent over the next twelve months, this would be a notable change to the overall tone of the market from recent years.

No asset class moves in only one direction alone and this expected pause in the market may well predicate further falls, potentially between 10-15 per cent over the next five years.  Whilst on initial inspection this may appear to be significant fall, this forecast equates to the increase witnessed across the market since 2008 and would continue to place agricultural land amongst one of the most stable and secure assets, continuing to be comparable to gold,  within the current investment arena.