Farmland is an excellent long-term investment. We believe the world is in a period of elevated demand for crops due to the combined requirements for “food, feed, and fuel”:
The world population grows every year requiring each hectare to produce more;
China and India are moving to a high meat diet driving livestock feed demand;
Biofuels are diverting crops from food use;
We believe Bulgarian farmland has some highly unique and useful characteristics - low volatility, low correlations to traditional asset classes, high risk adjusted returns, strong linkage to emerging market growth with limited political risk and reliable cash-flow generation. Taking each of these in turn:
Farmland prices exhibit low volatility in general and in particular when compared to listed equities. See below the relative performances of the MSCI Eastern Europe index*, the index SOFIX** and the Bulgarian farmland market for the last 10 years. The volatility of the BG farmland is almost 2 times lower than the one of the indexes of listed equities in Bulgaria and 2.5 times lower than the one of the comparable region of Eastern Europe.
* MSCI Eastern Europe Index reflects companies with large and average capitalization from the region;
** SOFIX is an index based on the market capitalization of the 15 stocks traded on the Bulgarian Stock Exchange, which have the highest liquidity and the highest market value of free-float.
|Holding period return||-9%||217%||39%|
|Year||Δ% MSCI Eastern Europe||Δ% farmland||Δ% SOFIX|
|Standard deviation - volatility||30%||12%||20%|
|CAGR (Compound annual growth rate)||-1%||14%||4%|
High absolute returns
Farmland typically generates higher returns than listed equities over long periods. In our example above the BG farmland earns average yearly growth of 14% for a period of 10 years, which is three times higher compared to the shares of the listed equities, which form the above-mentioned indexes.
High Risk Adjusted Returns/Sharpe Ratio
The combination of lower volatility with these higher returns leads to one of the most important financial qualities of farmland - high risk adjusted returns or Sharpe Ratio.
Farmland has a low correlation to traditional retail investments - public equities and bonds and commercial real estate. Most of these traditional retail investments are exhibiting high positive cross correlations so it is very difficult for investors to construct diversified portfolios with the mainstream options. So for investors looking for genuine diversification, allocations to non-traditional and uncorrelated sectors like farmland continue to grow in appeal.
Emerging Market Linkage
As emerging markets develop, the consumption of energy and agriculture commodities increases rapidly at the early stages of GDP/capita growth. However, direct investments into emerging markets come with considerable political risk. By way of contrast, direct investments into farmland in an EU country like Bulgaria provide linkage to emerging market growth but without political risk, opaque accounting, dubious legal systems etc.
Land in Bulgaria is an undervalued asset, its price takes the bottom rank among land prices of the EU countries. The natural price convergence creates attractive potential for appreciation of more than 10% annually. Additional growth impact stems from consolidation of the fragmented land plots.
- Cash flow
By leasing the land to farmers an investor in farmland can look forward to reliable cash-flow (about 3% gross pa) without operational risk. In addition, as cash-rents tend to track land prices with a lag, farmland rental cash-flows tend to be inflation hedging themselves.