Real assets such as farmland are now regarded as a store of value amid doubts over the quality of other financial assets. China is buying up farmland internationally and paying prices that others can't afford.
While ensuring its own food stability for the future, there may be political risk generated by this gambit, if those countries are faced with paying inflated market prices, then take umbrage about Chinese farmers growing food on their patch and sending it back to the motherland.
"People want more pork and motorcycles, and that increases demand for commodities. Infrastructure, timberland and farmland is where we are developing the curriculum,” says CAIA’s Keith Black during a visit to Hong Kong.
He works as an associate director of curriculum for the Chartered Alternative Investment Analyst Association. He formerly worked as a commodities trader for First Chicago and in commodities/managed futures hedge fund research for Ennis Krupp.
In lower income countries, commodities such as food represent a large proportion of a family’s average monthly expenditure – almost double the proportion spent by families in the US. And food prices are rising. The question is: are prices rising due to speculators, which would again focus consumer wrath on those profiteering from commodities trading?
Black doesn’t think so, citing that rice and steel, which are both commodities with little speculative activity, have also risen in price, leading him to infer that the price dynamics of commodities are being driven by end-demand.
Availability of water is another area of potential political risk – in the sense that if one farmer has water and one doesn’t, and the guy with the water is a foreigner, then if push comes to shove his water supply could be requisitioned by the government. Black recommends profiting in the water sector not by owning the gallons themselves – the physical commodity – but by owning distribution pipes and water purification facilities.
"The frontier in farming is in Brazil, where former scrubland is being used to cultivate grains and sugar,” he says. “A big barrier to entry is paying for the machines and infrastructure, as these places can be a long way from roads and ports.
"That’s why private equity money is so valuable. The right technology can double or triple farm productivity. Farms in Brazil are very capital-constrained. If you can buy seed and machinery at seasonal lows, you have a significant advantage.”
One deluxe product for the discerning farm investor is a tractor that talks to satellites. The satellite looks down at the ground, and by figuring out the moisture and heat emanating from it, can do its sums and work out how much fertilizer a plot needs.
The GPS on the tractor talks to the satellite, and hooks up its muck spreader, or chemical fertiliser, to scatter the necessary product on the ground in the correct quantity. That’s a six figure buy, so it’s one for the rich farmer.