Its All About The Money – Or Is It?
In the summer of 2008 – just as the first banks were beginning to collapse and arable farmland reached £7,000 per acre – I predicted that it would not be long before large commercial blocks of agricultural land would make £10,000 per acre. What I did not expect was that this would happen so quickly.
In 2012, the economic environment we live and work in is exceptionally volatile. We have come to expect nations and currencies to collapse under the strain of financial mismanagement and the past excesses of credit booms and consumerism. We are also faced with the world’s burgeoning population (destined to grow by 2 billion over the next few decades) and the food/water nexus is the hot topic! All of this is good news for the farming industry and agricultural land values both in the North East of England and the UK as a whole. Wouldn’t you want the security of knowing that your hard earned cash is invested in something that is still going to be around tomorrow, is growing in capital value year on year at the present time, also has the ability to actually grow and produce food and energy in the Armageddon scenario, and also has the extraordinary added bonus of being highly tax efficient.
It all may seem too good to be true in the land owning and farming sector, and it certainly does tick a number of investment boxes. That said, virtually everything we do in life carries an element of risk.
Perception of risk depends upon information available to you, track record, regulation, etc. All business and trading involves varying elements of risk.
So what are the big risk factors in farming and land ownership? Currency exchange rates have a huge impact on the farm business bottom line. Commodity prices are a function in part, of exchange rates, as are the subsidies received from Brussels. Tag along with that the cost of fuel, fertilizer and chemicals and wow – that is a big part of the farm profit and loss account which is at risk from a factor over which the farmer has absolutely no – zippo – control bearing in mind that it is glaringly obvious that the Euro is going to blow a major gasket this year, the impact on farm profitability could be substantial.
Which takes me onto the subject of return. Normally the higher the risk, the higher the return – that is the theory anyway! Return, of course, does not always present itself in the form of hard cash – it may be a nice place to live, flexibility of work demand, an opportunity to see the family – different people have different priorities. In UK farming there are two very distinct, separate elements. The first is owning land – the other is occupying that land in order to produce crops or livestock – and they sit right at the opposite ends of the risk spectrum. Receiving rent from land is one of the very lowest risk investments in the current economic climate. Generating profit from farming that land, is – well – subject to the vagaries of the weather, currency exchange rates, interest rates – you get my drift! A well run business needs to recognise the risks and consider the impact of them if they happen to come steaming around the corner.
So, what does the future hold?
It doesn’t seem likely that there will be a fall in land values going forward. Demand for food will continue to grow and the UK with its relatively high rainfall is likely to be a prime area of production.
Worldwide financial instability is down to continue for, at least, the next three to five years. It is anticipated that these factors will continue to support the farming industry and rising land values in the UK and abroad. So purchase of land today is an investment that subject to the right location is certainly going to be around tomorrow; what you need to think about are the challenges and risks of managing your piece of rural England. If managed effectively, by a skilled team, then it is my belief that land ownership is one of the most rewarding investments and can form part of your heritage to hand on to the next generation.