U.S. Farmland Best Investment
For investors interested in farmland, there are a lot of options around the globe. Investors have been recently acquiring farmland in the U.S., Canada, Brazil, Africa, and Eastern Europe. Agriculture, as a whole, is developing as a strong long-term investment, but there has been an on-going debate: What is the best farmland investment in the world?
We believe that Midwestern U.S. farmland provides investors the best opportunity and risk to reward. Farmland may be acquired at a cheaper price in other regions of the world, but these opportunities may not have the same soil quality, transportation infrastructure, or government that supports property rights.
Only 7% of the Earth's land surface is suitable for cultivation, the remainder is either too hot, too cold, too salty, too steep, or too stony. Roughly 50% of the contiguous United States is suitable for cultivation according to Richard E. Lyng, former Secretary of Agriculture.
To understand why U.S. farmland is the best investment, you must analyze these following factors:
· Soil Content
· Growing Season
· Property Rights
· Government Support
Soil content is the first factor that should be evaluated when trying to understand what specifically makes one piece of farmland better than another?
There are twelve types of soil taxonomy in the world. Of the twelve, the most naturally fertile soils are mollisols, according to Robert McLeese, soil scientist for the Natural Resource Conservation Service (NRCS). Mollisols are predominantly found in only four places on Earth: in the U.S., the Pampas region of Argentina, the steppes of Ukraine and Russia, and in areas of Northeast China.
Mollisols make up 7% of the ice-free land in the world, according to the NRCS. Mollisols are the best soils for farming because they contain large quantities of organic matter.
Mollisols found in the Midwestern U.S. are the best for agriculture due to the grasslands that were present thousands of years ago. These prairies produced strong and fertile soils because after each year, the grasses would breakdown and contribute nutrients to the ground. In other areas of the world where mollisols are found, short and mid-sized grass prairies were present. These shorter prairies contributed to the fertile land, but did not contribute the same soil nutrients as the tall grass prairies.
Once the Wisconsin Glacier retracted from Illinois and Iowa, great dust storms blew fertile silt on top of the young land, making this land the ideal for farming.
Almost any region in the world could yield large amounts of corn, but it would require a substantial amount of fertilizer, and would not be cost effective. Areas that have been deforested, such as Brazil, have fairly rich soil, but it runs thin and cannot affectively hold nutrients. Forest soils include ultisols and oxisols, which are not as thick or rich as mollisols. Deforestation can create new cropland, but the components that make up its topsoil cannot be permanently changed. In other words, ultisols and oxisols cannot be turned into rich mollisols.
Forest soils are typically much older than prairie soils because glaciers have covered up prairies multiple times, and water filters through them differently. If someone were to simply add nutrients to forest soils in hopes of creating productive farmland, phosphate issues will arise. Forest soils cannot absorb enough phosphate to make it useful for plants because there is not enough organic matter present. The phosphate will clump and become useless to the soil and plants. There is no substitute for mollisols when it comes to first-class farmland.
In Africa, the soil is not very welcoming for many agriculture crops. Sub-Saharan Africa is classified as having small amounts of favorable humid temperate climate, but primarily dry and humid equatorial climates, according to the Köppen-Geiger climate classification. The favorable humid temperate and humid cold climates stretch across the Midwest and Eastern U.S.
Forested areas are poor at producing crops because the top soil is very thin, like Robert McLeese explained. Sub-Saharan Africa is littered with rainforests and temperate forests, according to the Food and Agriculture Organization of the United Nations, which does not make the land there ideal for farming.
Areas stricken by extreme erosion are not ideal for farming either. A study found three-quarters of Africa's farmland is plagued by severe soil degradation caused by wind and soil erosion and the loss of vital mineral nutrients, according to an article from the Independent.
Soil must also retain water in order for it to be considered supportive of growing. Water retention is important for growing crops, because plants require readily available water for growth. The size and make up of a soil’s contents give it the ability to retain water. Soil with smaller particles will retain more water because the particles have more surface area to hold the water, according to Dean Yonts, Extension Irrigation Engineer at the Panhandle Research and Extension Center. Small soil particles still only allow roughly half of the moisture to be used by plants, because plant roots cannot draw all of the water from the surface of soil particles. It is important that soil can retain a great deal of water so plant roots can absorb as much water as possible.
Besides in the U.S., soil is able to hold water effectively in Argentina's Pampas region, as well as Ukraine and into Russia. In Northeast China there are also spotted areas where the fertile soil is good at retaining water.
The Midwestern U.S. has a perfect climate for growing a wide variety of crops. The Midwest has an adequate amount of warm humid days that help crops grow across Iowa, Illinois, and Indiana, where 33 to 40 inches of rain fall per year. Crops prosper in these strong soils that run thick and can efficiently hold moisture. Areas of Ukraine and Canada do not receive enough rainfall to support certain crops. Finally, the Midwest freezes hard which kills insects so large amounts of insecticides are not necessary, unlike areas closer to the equator.
Corn typically requires 2,700 growing degree days (GDD) to reach maturity. There are hybrids that require less, but normally yield will be lost. In central Illinois, there are approximately 3,000 GDD according to the USDA Forest Service. The more GDD, the larger the planting and harvest windows become, and the risk of frost is decreased. Of the places where mollisols are present, the Midwest U.S. provides an adequate amount of GDD.
In the prairies of Canada, there are mollisols present, and Canada freezes hard enough to kill insects, but the climate is too cold for certain crops to be productive there. The window for growing corn is small with frost threatening planting and maturity. Certain crops that require a shorter growing season, such as wheat, do well in Canadian prairie climates, but their crop choice is restricted because of the cold climate.
Warm climates do not provide ideal crop conditions either. In moderation, heat and moisture are vital to a crops life, but too much heat and moisture can harm crops by promoting insects and disease. In corn for example, molds become much more common when hot humid weather persists for long periods of time. Insects are a major problem in warmer climates as well. More insecticide is necessary to control pests in warm climates during all seasons, as there is not a hard winter freeze that kills them each year.
The ideal climate for growing crops is one that has enough growing days, receives adequate rainfall, and freezes hard in winter to kill off field pests. Only a few areas globally are able to fulfill the climate needs for crops, and the Midwest U.S. is one of them.
Not only is it important to have high quality soil, it is also necessary to have the existing infrastructure to transport and store crops. The U.S. has developed hundreds of thousands of miles of roads and rails for transporting crops. Grain elevators provide storage for crops, so farmers do not have to transport their crop all the way to the destination. Many areas in the world do not have the luxury of a strong agricultural infrastructure.
Rail is an efficient way of transporting crops after harvest, especially in areas where roads are not paved or cannot handle heavy trucks. The U.S. has the most rails out of any country in the world, allowing for fast, efficient grain transportation. This is a breakdown of the amount of rails per kilometer in each country according to the CIA World Fact Book:
In the U.S., there is an even 50% distribution of freight on roads and railroads. In Brazil, where there is one-eighth the amount of railroads per square KM, only 20% of freight is hauled on railroads, according to a special report from the Economist. The World Bank's Growth Commission suggests that 25% of a nation's GDP be reinvested in the country and 7% of it should go into infrastructure. Brazil reinvests 20% of its GDP, but only 0.1% into its infrastructure.
Africa is another region with a struggling infrastructure. Only one-third of Africans have access to an all-season road, according to the World Bank. Sub-Saharan Africa looses economic growth by two percentage points every year and reduces productivity by as much as 40% because of its lack of its electricity, water, roads and information and communications technology, according to the World Bank's Africa Infrastructure Study.
Without a stable government, even the best farmland in the world isn't worth investing in. Farmland owners must be aware of the political condition of the country where the farmland is located in. The country must promote agriculture and land ownership rights.
Some countries do not fully support land ownership rights. In Brazil there is a 1.5 million strong Landless Movement (MST). The MST uses interpretations of Brazilian law to try to spread out the ownership of farmland through land reform. In Brazil, 3% of landowners own two-thirds of available cropland, according to the MST. Actions by the MST range from peaceful to ruthless. In the northern state of Pernambuco, MST members shot and killed four men earlier this year, according to a recent special report from the Economist. Land owners have complained of land invasions by the MST. Major land owner Fibria, a wood pulp company, reported land invasions by the MST in remote areas of the Bahia state, according to the Economist.
Across Russia, gangs are pushing land owners from farmland, according to the independent Moscow News. Russian gangs have seized agricultural land in rural areas around major cities. Once seized, the land is handed over to investors who use the land in nonagricultural ways; typically building on the land. The newspaper also reported that the Russian government is aware of the seizures and no action has been done to stop it.
In regions where the political climate is unstable, farmland owners face the risk of their land being seized. The land may be able to be acquired for a low price, but unless the owner is willing to guard their land, they face the risk of losing it. In today's weak global economic environment, property rights will become a significant issue. Farmland in the U.S. allows its owners to sleep well at night knowing that they have solid ownership rights.
The U.S. Government has many farming subsidy programs available for domestic farmers and agribusinesses. These programs help balance the supply and demand of many commodities, as well as promote a greener environment. U.S. Government subsidies have been around for more than 75 years.
The Conservation Reserve Program (CRP) pays land owners not to farm their cropland. The payments help land owners protect areas where wildlife can grow and fertile land can take a break from producing crops. CRP contracts run for multiple years and proper upkeep must be done to the land throughout the contract. Other environmental programs include environmental quality incentives and wetland preservation.
Other programs subsidize commodities for farmers. A minimum base price will be set for a commodity, like soybeans. If the price of soybeans drops below the base price, then the government will subsidize farmers for the difference to get back to the base price. In addition, subsidies can be paid on top of any commodity price if the government feels that specific commodity's supply needs to be increased. These subsidies act as price insurance and they promote an increase in production.
Farm subsidies are given by other countries as well. China drastically changed their agriculture sector in 2004, by introducing subsidies and lifting agricultural taxes, according to the USDA's Economic Research Service (ERS). Ukraine has recently been trying to rebuild their subsidies since government subsidies were dissolved in the early 1990's after the Soviet Union broke up, according to the USDA's Foreign Agricultural Service (FAS).
U.S. Farmland Best Risk to Reward
A lot of factors need to be addressed when assessing a purchase of farmland around the world. We see U.S. farmland as the best opportunity for investors as it has some of the best soil in the world, the perfect climate for fertile crops, the adequate infrastructure for transporting grain, and a government that supports its farmers and property rights.