Consistent Returns in a Conservative, Tangible Investment
      An investment in agriculture is considered a conservative investment. However the average annual returns for quality, irrigated farmland are about 5% to 6%, not including land value appreciation. That's higher than current U.S. Treasury Bonds and AAA rated corporate bonds.

      Some investors have the misconception that agriculture is a risky venture. This is certainly the case for low quality land. On the other hand, prime investment-grade farmland provides a very consistent return while protecting and appreciating the principle. Many pension funds and insurance companies such as MetLife and Prudential take advantage of the security that crop land provides.

Hedge Against Inflation
      Real estate has traditionally been used as a hedge against inflation. While financial assets (securities such as stocks and bonds) lose value with inflation, real assets gain value(1). However, commercial real estate failed to act as a hedge in the early 90's due to large oversupplies of space in real property markets, causing them not to generate much income(2). In comparison, prime farmland is virtually always able to produce a return, and with inflation driving commodity prices up, the investor sees a higher return.

      Real Estate Investment Trusts, known as REITS, are one way to invest into real assets. However, according to the Real Estate Finance Journal, REITs do not provide any kind of hedge against either expected or unexpected inflation. Since REITs trade like stocks, they can share the same volatility, especially during times of unexpected inflation.

U.S. Agriculture's Economic Impact
      By providing the world with food and fiber, America's agricultural land creates a tremendous economic impact. The dominant role of U.S. agriculture in the global economy has been likened to OPEC's in the field of energy. The food and farming system is important to the balance of trade and the employment of nearly 23 million people. Across the country, farmland supports the economic base of many rural and suburban communities(3).

Demand for Food, Fiber and Energy
      Agriculture land is an absolute necessity, producing the basic human needs of food and clothing. With the rapidly increasing world population, the demand for agriculture commodities will soar. The most significant purchasers of U.S. agriculture exports are Asian and Latin American countries. Asian countries purchase an average of $23.6 billion per year, with Japan alone accounting for $10 billion per year. Latin America, including Mexico, purchases an average of about $10.6 billion of U.S. Agriculture exports annually(4). Developing countries are paving their precious agricultural land to support their rapidly expanding economies, making way for factories and housing developments. This will cause them to import even more agriculture commodities in the future, thus causing increases in demand which would correlate into higher commodity prices.

Land Appreciation: Available Farmland Acreage is Shrinking
      The United States loses about one million acres of farmland per year, and this rate has increased 51 percent from the rate reported in the previous decade!(5) Replaced by shopping centers, housing developments, and factories the amount of farmland in production decreases while the world population increases at an alarming rate. On average, farmland value has a long term appreciation rate of about 5% to 6%. As the acres of cropland in production decreases agriculture land will appreciate at an even faster rate, much like it did in the 1970's.

Irrigation Water is Rapidly Depleting
      Nearly 97% of the Earth's water is salt water in oceans and seas. Removing salt from ocean water is a very expensive process, one that scientists do not foresee getting much cheaper. Close to 2% is frozen in polar ice sheets and glaciers. Only a fraction of one percent is available for use for drinking, irrigation, and industrial use. This already small amount of freshwater is dangerously being depleted. All over the globe farmers and municipalities are pumping water out of the ground faster than it can be replenished. China's Yellow River, which is siphoned off by farmers and cities, has failed to reach the sea most years during the past decade. The green revolution in India was only possible by the installation of 20 million irrigation wells. However, enormous problems are lying ahead since the water table is dropping so fast from over use. India must now dig wells 500 feet into the earth, compared to just 100 feet 4 decades ago. In Central Asia, the Aral Sea shrank by half after the Soviets began diverting water for cotton and other crops. This is not just a foreign crisis. In the United States, the Colorado River barely makes it to the Gulf of California, while the Great Lakes recently reached its lowest point in 30 years!(6)

China
      The impact China will have on the agricultural economy of the United States is quite exciting. The United States has a population of about 276 million people and about 327 million crop acres in production. In comparison China has 1.3 billion people living off about 269 million crop acres (down from 300 million crop acres in 1990)(7). That gives the United States over 5 times more acres per person to grow food than China!

      The economic boom in China is just starting. With the 2008 Olympics in Beijing, China is developing the country at a fascinating rate, putting in place new infrastructure, hotels, parks, and other travel destinations to ensure that tourists will come back to China many times in this century. It is no wonder why China's overall imports rose 40.5% in the first 9 months of 2003 alone(8). According to Goldman Sachs, the average household income in China has increased 11% per year since 1999. With more expendable income, Chinese citizens will increase their spending on everyday items that we Americans sometimes take for granted.

      Already China imports one-third of all U.S. soybean exports, and this demand for vegetable oil for their people and soybean meal to feed their livestock will continue to increase. Per capita consumption of soybean oil in the U.S. is 60 pounds, compared to only 11 pounds in China, leaving tremendous room for growth(9). With more expendable income the Chinese are starting to eat much more meat. According to U.S. and Canadian officials, China will import 30,000 metric tons of beef next year, and they expect this figure to grow to 350,000 tons in ten years(10). The amount of soybean meal required as feed to meet this increase in cattle production will result in very profitable commodity prices for the agricultural investor.

      China is expected to have a 40 million ton decrease in grain production this year, marking the sixth consecutive decrease(11). Factors include shortage of irrigation water, decrease in overall agricultural acreage, and shifting acres from grain production to more profitable labor-intensive cash crops.

Increase in the use of Biofuels
      Besides the production of food and fiber, one other very promising and exciting reason to invest into farm land is the ever growing use of biofuels. Currently the United States is 60% dependent on foreign crude, but this is changing. The production and use of ethanol and biodiesel are increasing every year. In fact, if the new energy bill passes with the recent Renewable Fuel Standards (RFS), the federal government will require biofuel usage to increase from the current two billion gallons required in 2003 to five billion gallons by 2012.

      Ethanol is made through the fermentation of sugars, such as those found in corn. Currently the U.S. ethanol industry uses about 800 million bushels of corn a year. With the 62 ethanol plants in production in the U.S., and an additional fourteen plants in construction, projections show that this figure should increase to 1.8 billion bushels of corn by 2012.

      Biodiesel is the newer of the two biofuels in the United States. It is a biodegradable transportation fuel for use in diesel engines. Produced through the transesterification of organic fats, such as the oil derived from soybeans, biodiesel can either be used as an additive to petroleum based diesel or as a 100% replacement.

      According to a recent study by AUS Consultants, increasing the renewable content of motor fuel from 1.2% to 4% over the next 15 years would result in the displacement of 302 million barrels of crude oil per year, and will provide $6.6 billion annually in additional income to American Farmers(12).

1. Agricultural Income and Finance: Situation and Outlook Report AIS-71. Page 40. Economic Research Service/USDA. February 1999.Anthony Downs, "Should Commercial Real Estate be used as a hedge against inflation?," National Real Estate Investor June 1, 1999."Fact Sheet: Why Save Farmland?," American Farmland Trust May 2002, www.farmland.orgStatistical Abstract of the United States 2001, U.S. Census Bureau, P.535."Fact Sheet: Why Save Farmland?," American Farmland Trust May 2002, www.farmland.orgFen Montaigne, "Water Pressure," National Geographic September 2002Rich Pottorff and Dan Manternach, "There's a Bull in the China Shop," Doane's Focus Report. October 31, 2003: Volume 66, No. 44-5.Peter Wonacott, "China Saps Commodity Supplies" The Wall Street Journal October 24, 2003: C1, C9.Rich Pottorff and Dan Manternach, "There's a Bull in the China Shop," Doane's Focus Report. October 31, 2003: Volume 66, No. 44-5.Peter Wonacott, "China Saps Commodity Supplies" The Wall Street Journal October 24, 2003: C1, C9."China's Grain Output Seen Sliding for Sixth Straight Year" AFX News Limited November 4, 2003 www.progressivefarmer.com
2. John Urbanchuk, "An Economic Analysis of Legislation for a Renewable Fuels Requirement for Highway Motor Fuels," AUS Consultants November 7, 2001.