Agricultural assets are real assets, that is, they are tangible assets and consequently provide a hedge against inflation with low correlations to traditional asset classes and are traditionally less impacted by economic slowdowns.
In the wake of the GFC losses, more focus has been placed on alternative investments in order to access diversified sources of returns. In the US, farmland as an aggregate asset class has been shown to have a positive correlation with inflation and low correlation with many other equity classes and corporate debt. Similarly, in an Australian context, the returns from agribusiness have historically been negatively correlated to the returns of other asset classes and industries.
This means that including agricultural investments in a portfolio can provide significant diversification benefits, resulting in an increase in portfolio return or reducing overall portfolio risk. Agricultural investments, like any other, are subject to a number of risks.
In agriculture, the risks include drought, pests, disease, desertification, fire, commodity price volatility and political risks. The majority of these risks can be mitigated through a thorough understanding of the investment, as well as careful due diligence and high-quality management practices.
The case for agriculture exposure in investment portfolios remains convincing. The middle class growth in emerging economies and the associated increased protein consumption is one of the major positive factors as is the declining supply of readily available arable land per person.
Locally, the Free Trade Agreement with China and other Asian countries provides a further boost with tariffs for a range of agricultural commodities reduced over time. Over the very long-term agriculture in many countries has offered attractive pre-tax returns and strong diversification benefits showing little correlation with equities and bonds.
