Arable versus other agricultural sectors

We find that after an initial period of research and discussion, most investors end up focusing primarily (or entirely in the case of smaller portfolios) on the arable sector. The reasons are clear. Arable agriculture is where the supply and demand fundamentals driving agricultural investment are most clearly manifested. It is really only the arable sector that truly lies at the intersection of all three demand drivers for agricultural commodities: food, feed and fuel. Ethanol isn’t made out of almonds and pigs aren’t fed on organic kiwi fruit.

Arable staples (e.g. wheat, rice, corn and pulses) form the bulk of global agricultural production, land use and calorific intake. As a consequence, demand is less variable and meaningful supply increases (relative to the scale of demand) are more difficult to achieve than is the case with the majority of permanent crops (i.e. fruit and other tree / perennial crops). As a result the investment characteristics for arable enterprises (overall) are generally more compelling.

Incomes are more stable in the arable sector, capital appreciation is more reliable and downside events (both with respect to income and land values) are less common and less pronounced. Negative cycles are also less prolonged. Although these are generalisations, investors considering agriculture for the first time might want to take account of the following:

  1. Permanent crop enterprises can produce higher returns during periods of tight supply, but given their longer life cycle are also more vulnerable to prolonged periods of poor performance due to oversupply.
  2. Given the long and costly development cycles involved in permanent crop enterprises, investments are more capital intensive with returns taking longer to realise.
  3. The risk from disease and extreme weather events is higher because permanent crops are costly to replace and take years to reach full production potential.
  4. Permanent crops and livestock enterprises are more vulnerable to economic downturns because spending on higher value agricultural commodities is more discretionary than spending on arable staples.

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