Over the next 4 decades, the human race will have to grow and produce an amount of food greater than they have in all of the last 10,000 years put together.

To call this undertaking easy is a true miscalculation of the challenges that will be faced trying to achieve the goal. Cities are expanding rapidly as people choose to move closer to the hubs of business.

This trend of expanding cities is known as urbanization. The process has the unfortunate consequence of taking arable land out of production. This means that there is a greater demand placed on the remaining land to achieve higher crop yields.

I think it is highly unlikely that there will be a mass starvation event as humans have a tendency to rise and meet challenges, however I believe there will be significantly higher food prices around the world in the coming decades as supplies are stretched to meet demand.

Many entrepreneurs are developing innovative products to assist in meeting the production challenge, however obtaining finance in the regions that will experience the most growth in agricultural production (Africa, Latin America) can be hard at the best of times.

Companies that are willing to take on the certain risks that are posed in the developing markets of Africa and Latin America will likely be rewarded handsomely. Presently, financing terms are very appealing to those wishing to lend as the competition within the market has not developed sufficiently yet.

The purchase of agricultural farming company equities has been relatively difficult as 90% of farms are owned by individual families. This however, is destined to change with the increasing capital that is flowing into the sector.

The demographics that are shaping the change from individual ownership to company ownership include the rising costs of purchasing farm land and the average age of farmers in the western world.

I work in New Zealand where the average age of farmers is near 60 years old. It is similar in all western countries as pay for farm workers in minimal and the work isn’t most people’s cup of tea.

Family farms used to be handed down through the family but this is a dying trend as the next generation often cannot afford any property transfer costs, or simply don’t want to work in agriculture when a nice air conditioned office job will pay twice as much.

The farmers that own the property adjacent to the farm that I currently reside on were given their farm by their father. He purchased the farm in the late 60’s with one year’s wool pay-cheque. That farm is now worth multiple millions of dollars. That sort of price tag makes it almost impossible for individuals to take up farm ownership, hence the growth in company purchases.

The smart money is diving into agriculture. The company that I work for manages the purchases of agricultural land in deals worth hundreds of millions of dollars. This sort of money is coming from state owned pension funds and hedge funds.

The amount of money in agricultural orientated funds is growing, but it is still in stark contrast to the amount of money backing infrastructure and real estate.

As the fundamentals driving the food shortage begin to become more pronounced, it is reasonable to assume that we will see more political upheaval in the developing world. Historically, when the cost of food consumes more than 40% of people’s wages, civil strife is just around the corner. An example of this is the “Arab Spring”.

Agriculture as an asset class has performed spectacularly in the western world for the past 20 years. Arable land values in western nations have soared and this has caused some concern about a price bubble.

I’m of the opinion that the prices at the current level are justified in the majority of cases and I cannot for-see any major downside in land values due to the fundamentals. I would encourage investors to examine the emerging markets as opposed to the west as the arable land prices are much more affordable and offer multiple times the return, without multiple times the risk in many cases.

Unlike gold, most agricultural assets return a yield whilst still offering the inflation protection of a hard asset. The non-correlation to bonds and other traditional assets presents another appealing characteristic. Having a diversified portfolio can shield an investor from the losses in another sector.

I’m wildly bullish on precious metal miners, however the market has continued to prove me wrong. Holding agricultural assets has shielded me from the downturn in the metals and I have so far been able to avoid having to answer to the quote “markets can remain irrational longer than you can remain solvent”.

The great majority of investors I speak to about agriculture tend to avoid it because they are not fully informed on the risks inherent with the asset class. Information on water scarcity, climate change, soil quality and animal dietary requirements often confuses even the brightest money managers and consequently, they choose to remain on the sidelines.

Multi-billion dollar deals within the sector are hard to execute because of the amount of land involved. Hundreds of thousands of hectares can encompass entire tribes and regions within areas of Africa so the consultation process with governments can be very time intensive. This can deter large investors from putting big money on the table when easier options are still available outside of the sector.

Agriculture is a fascinating investment class and like precious metals, has the fundamentals required to deliver spectacular returns. I would encourage investors to take a closer look at fertilizer producers. These companies are sitting on the gold mines of the future. Those that are located in the developing world are primed for returns that can only be fantasized about.

The profit margin in fertilizer production can be around 70% with the production process being relatively simple for common variants. The margin drastically increases where specialized products are concerned.

Agricultural assets are still undervalued by a long shot and with the fundamentals that are currently driving the boom unlikely to change any time soon, this presents an excellent opportunity to become involved in the sector.

“The true investor scarcely ever is forced to sell his shares, and at all other times he is free to disregard the current price quotation. He need pay attention to it and act upon it only to the extent that it suits his book, and no more.* Thus the investor who permits himself to be stampeded or unduly worried by unjustified market declines in his holdings is perversely transforming his basic advantage into a basic disadvantage. That man would be better off if his stocks had no market quotation at all, for he would then be spared the mental anguish caused him by other persons’ mistakes of judgment.”

― Benjamin Graham, The Intelligent Investor