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DGC Asset Management

Asset Class Guide [DGC/ACG/FARM/002]

Farmland as an Alternative Investment Asset Class

Fundamentals – Characteristics – Performance – Opportunities – Risks

David Garner

Wendy Brittain

Northampton, UK, 2012

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investment demand for tangible assets such as agricultural

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properties; competition for available agricultural

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A report from DGC Asset Management designed to provide interested

parties with an insight into the characteristics, benefits and risks

associated with farmland considered as an investable asset class.

This report has been prepared by David Garner. David is a Partner at DGC Asset Management, and this

report is designed to offer an introduction to productive agricultural land as an asset class, as well as

its current potential as a property-based alternative investment.

The report has been constructed utilising rigorous academic standards and references a wide range of

research sources which are all quoted in the reference section.

UK Investors should seek the advice of an authorised Independent Financial Advisor with experience

of the asset class before committing to any investment. DGC work directly with Investors and Advisors,

providing detailed information on the portfolio risks associated with Farmland Investment, particularly

in the United Kingdom, Australia and Latin America, as well as offering a range of farmland assets and

agricultural productivity joint ventures for Investors

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Contents

Executive Summary

1. An Introduction to Farmland

2. Investment Fundamentals

2.1 Population growth

2.2 Dietary Shift

2.3 Agricultural productivity

2.4 Climate Change

2.5 Biofuels

2.6 Farmland Availability

3. Investment Characteristics

3.1 Capital preservation

3.2 Inflation hedging

3.3 Income

3.4 Total returns

3.5 The recessionary hedge

3.6 Portfolio diversification

3.7 Simplicity and security

3.8 Tax incentives

4. Investment Performance

4.1 United Kingdom

4.2 North America

4.3 South America

4.4 Europe

4.5 Asia

4.6 Africa

4.7 Summary

5. Investment Strategies

5.1 Let land

5.2 Greenfield development

6. Risks

6.1 General investment risk

6.2 Commodity prices

6.3 General agricultural risk

6.4 Geographic risk

6.5 Liquidity

6.6 Regulatory risk

6.7 Inflation / Deflation

6.8 Currency risk

6.9 Counterparty risk

6.10 Asset specific risk

8. Summary

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Executive Summary

The global financial crisis that began on January 3rd 2007 with the Chapter 11 Bankruptcy filing of

Ownit Mortgage Solutions owing Merrill Lynch around $93 million, has since claimed a number of

high-profile casualties including the economies of Iceland, Ireland and Greece, and continues to this

day with on-going uncertainty over the future of the major Eurozone economies of Spain, Italy and

even the United States.

Under currently prevailing market conditions, many Investors are reducing their exposure to equities,

and seeking alternative assets to boost returns without dramatically altering their overall risk profile.

The current environment for investors can be categorised by:

1. Economic uncertainty (poor visibility).

2. Price volatility in mainstream assets.

3. Concerns over inflation.

4. Poor returns on cash deposits.

Consequently, Investors are seeking alternative investment assets that display the following

characteristics:

1. Tangible assets that retain capital value.

2. Simple, secure investments involving direct ownership of underlying tangible assets.

3. Assets that generate tax-efficient income to replace lost risk-free income.

4. Low or zero correlation to financial markets.

5. Capital growth supported by solid fundamental trends.

Productive agricultural land displays all of these characteristics, making this unique asset class a

popular tool amongst Institutional Investors with which to diversify investment portfolios, reduce

overall risk, hedge inflation, generate income & growth, and in many cases, improve tax efficiency.

Billions of institutional investment dollars are being allocated to farmland assets by a number of large

Institutional Investors and Sovereign Wealth Funds which continue to acquire large farm properties all

over the world including; AP2 (Sweden), ABP (Netherlands), APG (Netherlands), ATP (Denmark), BT

Pension Scheme (UK), Hermes EOS (UK), PGGM (Netherlands), TIAA-CREF (US), Ascension Health,

(USA), CalPERS (California Public Employees Retirement System), Dow Chemical (USA), New Zealand

Superannuation Fund, and PGGM (Pension Fund for Care and Well-Being), Netherlands.

This report provides an overview for Investors considering agricultural land as an addition to a well-

diversified portfolio, covering the fundamentals that drive investment performance, characteristics of

the asset class, and risks associated with various modes of investment.

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1. An Introduction to Farmland

Farmland investments are essentially simple

property transactions, involving the acquisition

and possibly development of land with

agricultural potential for the production of

crops or livestock. Investors may choose to

acquire productive land which is either leased

to a tenant farmer, or may choose to engage

in a more participatory role, sharing in harvest

revenues under a Contract Farming Agreement

(CFA). Another strategy that has proven

exceptionally profitable in emerging markets

involves the acquisition of land with

agricultural potential and adding value

through conversion into productive

agricultural assets, including investing in on-

farm infrastructure such as roads, storage and

irrigation.

Farmland investments present a two-fold

opportunity to capture superior risk and

inflation-adjusted returns. Unlike other

physical assets considered an inflation hedge

such as gold, farmland generates annual

income, and capital values are driven by

demand for agricultural commodities rather

than the dynamics of financial markets. This

makes farmland investing particularly attractive

to Investors wishing to hold productive assets

that are not affected by volatility in financial

market.

These characteristics make farmland a useful

portfolio diversification and optimisation tool,

allowing Investors and Financial Planners to

dissipate volatility, generate income and hedge

inflation, whilst also reducing the overall risk

profile of a portfolio. Specific expertise is

required during the farmland acquisition and

due diligence process, not only in order to

identify effective investment strategy, taking

into account asset mix (crop choice), business

strategy (development opportunities) and deal

structure (farming agreements).

Historically, the best financial gains have been

derived from the development of previously

unused land into productive agricultural

properties through the establishment of

transport infrastructure, irrigation and soil

quality controls. Not only does this strategy

add substantial capital value to land assets, but

also generates an annual income stream which

can be re-invested or utilised to cover the cost

of development financing. Emerging markets

in close proximity to high-growth, high-

demand markets in Asia, Africa and Latin

America offer the most potential for Investors.

Over 80% of future food and energy demand

will come from the developing world; therefore

Investors in control of productive agricultural

assets capable of supplying products to meet

that demand will be best-positioned to

capture financial returns driven by population

expansion and rising incomes.

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Investment Fundamentals

The primary drivers underpinning current and future farmland values are economic growth, personal

income, and population growth, all of which ultimately dictate global demand for food, feed and fuel.

In the long term, demand for agricultural commodities is therefore expected to increase in line with

growth in these key drivers.

Commodity prices, location and productivity all play a part in supporting agricultural land values in

the short term, as Farmers and Investors are prepared to pay more to acquire or lease land that is

most productive and accessible, and therefore most profitable.

In the long-term however, increasing demand for agricultural commodities in the face of a finite stock

of suitable productive land will continue to push asset price forwards in line with, or faster than the

rate of inflation, whilst also generating incomes with closer ties to global demographics than financial

markets.

The simple fact is that demand for productive land is resultant of demand for agricultural

commodities, and as demand rises, so too do values. When also considering that supply of productive

land cannot be increased, this creates the potential for exponential growth in value as capital

competes for the most productive assets.

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2.1 Population Growth

More people simply require more food and

associated agricultural commodities for

livestock feed and biofuels, therefore

population growth remains a key driver of

long-term farmland values.

Monday 31st October 2011 marked the birth of

Danica May Camacho in the Philippines. At

5.5lbs, Danica May is a tiny person that

represents an enormous global milestone as

she was chosen by the United Nations to

symbolically mark the global population

reaching 7 billion people.

In fact, the human population has increased by

almost 400% in the past 100 years alone with a

net increase of 225,000 new people per day

during the last decade. Currently, more than

5% of the total number of people that have

ever lived are alive today, and over 1 billion

people have been added to the global

population in the last 12 years. On current

trend, the global population is projected to be

roughly 40% higher than today by 2050 (UN

Population Division, 2007, UN 2006 population

revision).

To put this in perspective, this is the equivalent

of adding the total population of Greater

London (7,556,900 people) to the world’s

headcount every month (Wikipedia, 2011).

Whilst a range of scenarios and population

forecasts exist, it is widely agreed that growth

in demand for grain will double in the run up

to 2050 and that the impact on food prices will

be substantial (UN Environment Programme

Rapid Response Assessment, 2009, The

Environmental Food Crisis: The environments

role in averting future food crises).

Danica May Camacho: The worlds 7 billionth

person

225,000 Daily global population growth

400% Population growth in 100 years

100% Grain demand growth by 2050

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2.2 Dietary Shift

As existing populations in developing

economies become richer, they shift towards a

higher protein, more resource intensive diet,

and millions of new meat eaters come to the

table annually. This dietary shift is driven

primarily by rising household incomes. On

average annual incomes are forecast to rise by

just under 300% from US$ 5,300 to US$ 16,000

by 2050 (Alexandratos, N. World food and

agriculture: outlook for the medium and

longer term).

The recent decades of unparalleled global

economic expansion, most pronounced in

developing and emerging economies, has

resulted in the proliferation of a new middle

class that has purchasing power beyond their

basic needs. In fact, per capita meat

consumption in developing countries has

doubled since the early 1980s.

Whilst livestock production has historically

been supported by grazing and crop/food

waste, an increasing demand for meat has led

the global livestock industry to become

increasingly reliant on grain as a primary

livestock feed. According to the United States

Department of Agriculture (USDA), in modern

intensive livestock farming where the majority

of feed is grain based, 7kg of grain are

required to produce one kilogramme of beef

(Fortune Magazine, 2009, As world population

expands, the demand for arable land should

soar. At least that’s what George Soros, Lord

Rothschild, and other investors believe).

On a global average basis, given that part of

the production is based on other sources of

feed, such as grazing land and organic waste, 3

kg of grain is required to produce 1 kg of meat

(FAO, 2006, Livestock’s long shadow).

Consumption of

meat is expected to

rise by up to 100%

by 2050 in many

emerging market

economies.

Demand for grains

for use as animal

feed will increase,

therefore so too will

demand for arable

land on which to

grow them.

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As meat production now depends on grain as

a key input, any increase in demand for meat

results in an acceleration of demand for arable

and grazing land area. At least 35–40% of all

cereal produced in 2008 was used as feed for

livestock (FAO, 2006, Livestock’s long

shadow). This leaves an estimated 43% of

cereal production available for human

consumption after losses from harvest, post-

harvest and distribution are taken into

account.

In percentage terms, the effect of increased

income on diets is greatest among lower and

middle-income populations which currently

consume the lowest percentage of animal

products (Devine. R., 2003, La consommation

des produits carnés, INRA).

This indicates great potential for increased

meat demand on a global basis given that low-

income countries which account for 5.1 billion

of the world’s population consume less than

half as much meat (as a percentage of dietary

energy intake) as high-income countries which

account for only 1.3 billion of the world’s

population (FAO, 2008, The state of food

insecurity in the world 2008).

According to the UN FAO, consumption of

animal products per capita in industrialised

nations will increase modestly from 825 kcals

per person per day today, to just fewer than

900 kcals per person per day by 2050. Yet in

East Asia meat consumption is expected to rise

from around 400 Kcals per person per day to

around 625 Kcals per person per day, an

increase of over 56%. Meat consumption in

South Asia meanwhile is expected to double

from 200 Kcals to 400Kcals (Food and

Agriculture Organisation of the United

Nations, 2006).

100% Increase in meat calories

consumed in South Asia by 2050

35-40% Proportion of global grains

production used for animal feed

7kg Amount of grain required to

produce 1kg of beef

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2.3 Agricultural Yields

With demand at an all-time high and current

productivity already leaving over 1 billion

people undernourished (UN FAO, 2009), only

three possible solutions exist; bring more land

under production; increase yield from existing

land; or a combination of both. Of course logic

dictates that no single solution alone can solve

current and future disparity between supply

and demand, therefore we must look to the

possibility of both.

At every point in history when food demand

has outweighed supply, there has been

opportunity to increase productivity, either

through the development of suitable land into

farmland, (as in the post-depression era of the

1920s) or the application of fertilizers to

maximise yield per hectare (as in the green

revolution of the 1970s). Now in 2011 there is

very little suitable land left to be developed,

and the application of fertilizers, herbicides

and pesticides result in annual yield increases

of less than 1%.

In the 1960s, agricultural yields increased by

3.5% per year, but by the 1990s annual

increases had fallen to only 0.5% per year,

despite the fact that global use of nitrogen

fertilizers during the period increased by

approximately 700% and water use doubled.

Whereas, in the four decades between 1960

and 2000, the actual increase in cereal

production was only 167% (FAOSTAT, 2009).

Furthermore, at the point yield gains achieved

through the application of nitrogen based

fertilisers bottomed out during the early 1980s,

per capita consumption of cereals also started

to decline. The data clearly indicates that

increasing yield per hectare cannot provide the

increase in productivity required to meet

current or future demand for food.

In other words, with regard to agricultural

productivity, the world turned a corner

sometime in the early part of the last century

and the 1980s respectively, from a state of

increasing supply of food and farmland

availability, to a state of decreasing supply

relative to the population. This is extremely

significant. We are now living in an era, where

for the second time in recent human history,

per capita food supply is in decline (the first

time being prior to the Green Revolution when

there was widespread starvation in Asia and

Africa), and this is all taking place at a time

when climate change threatens to constrain

both further expansion of agricultural land as

well as yields on existing lands.

So it seems we may be at the Zenith of

agricultural productivity using current

technology, therefore we cannot simply grow

more food to sate future demand.

1.1% Annual global population growth

0.5% Annual increase in agricultural

yields

1 Billion Amount of people currently

undernourished

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2.4 Climate Change

Climate change impacts agricultural

productivity through soil degradation, water

scarcity, rising global temperatures, and as a

result of climate driven weather events.

Statistical data shows the undeniable trend

towards a greater frequency of weather and

temperature related anomalies. Global surface

temperatures have risen by more than 4%,

between 1880 and 2000 (US National Oceanic

and Atmospheric Administration, 2008). This

has had the effect of distorting normal rainfall

patterns and creating a greater frequency of

extreme weather events.

The total number of natural disasters

(excluding earthquakes) has increased by

approximately 1000% between 1960 and the

present time, with the number of food

emergencies roughly doubling since 1980

(Food and Agriculture Organisation of the

United Nations, 2008). These effects are also

becoming more sudden and unpredictable,

making mitigation and management ever

more challenging and amplifying the negative

effects on agricultural productivity.

Against a background of rising demand this

could have significant implications for

commodity prices and farmland values.

On average, yields of the dominant regional

crops may fall by 15–35% in Africa and

Western Asia once temperatures rise by 3 or 4

degrees (Stern Review, 2006, The Economics of

Climate Change, Part II: The Impacts of Climate

Change on Growth and Development). Even

without including the effects of extreme

weather events in forecasting models, a study

for Southern Africa forecasts declines in

production of 15% for wheat and 27% for

maize by 2030, at a time when the more

extreme effects of climate change would only

just be emerging (Lobell et al. (2008).

Prioritizing climate change adaptation needs

for food security in 2030).

The Food and Agriculture Organisation of the

United Nations states:

“The current scenarios of losses and

constraints due to climate change and

environmental degradation – with no policy

change - suggest that production increases

could fall to 0.87% towards 2030 and only

0.5% between 2030–2050”

(UN Environment Programme Rapid Response

Assessment, 2009, The Environmental Food

Crisis: The environment’s role in averting

future food Crises).

27% Decline in South African maize

production by 2030

15% Decline in South African wheat

production by 2030

1000% Increase in natural disasters

between 1960 and 2008

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2.5 Biofuels

Increasing demand for oil in the face of

dwindling natural resources and the resultant

rise in oil prices has the potential to be the

most significant source of uncertainty for

agricultural commodity prices.

As agricultural production both consumes and

produces energy, energy agricultural and

markets have always adjusted to each other,

with output and consumption rising or falling

in response to changing relative prices. Rapidly

increasing demand for biofuels is now tying

agriculture and energy more closely than ever.

There are two reasons for this correlation;

firstly higher oil prices drive demand for

alternative fuels which require feedstock such

as corn or maize produced on agricultural

land. Secondly, oil and natural gas are key

agricultural inputs and as such, fluctuations in

price and availability of fossil fuels could have

a major impact on agricultural economics and

productivity.

As biofuel use expands, this will add further

upward pressure to feedstock prices and

consequently, the value of the land on which

they are produced (Banse et al., 2008, Will EU

biofuel policies affect global agricultural

markets? European Review of Agricultural

Economics).

According to a 2009 report from the United

Nations:

“Biofuels could have a significant impact on

food prices if oil prices remain high or the cost

of biofuels production declines” (United Nations Environment Programme Rapid Response Assessment, 2009, The

Environmental Food Crisis: The environments role in averting future food crises).

As the 2009 joint OECD United Nations report,

Agricultural Outlook 2008-2017, puts it:

“The nature and composition of demand, on

the other hand, are factors that may increase

the future variability in world prices. As

discussed, industrial demand for grains and

oilseeds – such as for the production of

biofuels – constitutes a growing share of total

use. This demand is generally considered less

responsive to prices than traditional food and

feed demand.”

The prolific demand for maize arising from the

rapidly expanding ethanol sector in the United

States has profoundly affected the coarse-

grain market. By 2017, approximately 40% of

the country’s maize crop could be destined

for energy production. However, overall there

will be constraints in expanding new arable

areas in many countries and competition for

land and resources among grain and oilseed

crops is set to intensify with those crops

offering the highest returns gaining the most

ground.

Biofuel production (including bioethanol and

biodiesel) is expanding rapidly as a number of

countries attempt to deal with energy security

concerns in an era of high oil prices and

diminishing reserves of crude oil. Legislation

and policies to promote biofuel production

and use, whether through mandate or subsidy,

will lead to greater purchases of feed-stocks

for biofuel production.

The US is the largest producer and consumer

of bioethanol, followed by Brazil which now

uses 2.7 million ha of land for biofuels

production, equivalent to 4.5% of its cropland

_________________________________________________________________________________

area, mainly planted to sugar cane. Globally,

biofuels including bioethanol (mainly from

sugarcane and corn) and biodiesel (mainly

from soybean, palm oil and other oil seed

crops), accounted for roughly 1% of total fuel

consumption for road transport in 2005 and it

may reach 25% by 2050.

The EU has set a target of 10% of all land

transport fuels to come from biofuels by 2020.

(World Bank, 2008, Rising Food and Fuel

Prices: Addressing the Risks to Future

Generations) | FAO, 2008, The state of food

and agriculture 2008). To put this into

perspective, a 2006 report from Food and

Agriculture Organisation of the United Nations

suggested that for the EU to meet its 10 per

cent target from home-grown biofuels would

require a staggering 70% of arable land to be

taken out of food production, necessitating a

huge increase in EU food imports. (Telegraph

Online, 12 July 2008, The Great Biofuels Con).

According to a recent OECD report, under

current policies, areas for biofuel crops are

projected to increase by 242% between 2005

and 2030 (OECD, 2008, OECD Environmental

Outlook to 2030). The OECD has forecast

scenarios for future increases in the allocation

of land to growing biofuel feed-crops. Their

model predicts that the proportion of cropland

dedicated to biofuels will increase from 0.5% in

2008 to 2% by 2030 (range 1–3%) and 5% by

2050 (range 2–8%) (United Nations

Environment Programme Rapid Response

Assessment, February 2009, The Environmental

Food Crisis: The environment’s role in

averting future food crises).

The higher the oil price, the more economically

viable biofuel production becomes (even

without subsidies or climate change mitigation

incentives) and the greater will be the

competition for cropland. At oil prices above

the $50 mark, biofuel production becomes

capable of producing significant profits thus

creating stiff competition and forcing up the

price of maize, wheat and other feedstock

crops.

An OECD-FAO report forecasts that food prices

will rise by between 20% and 50% by 2016,

partly as a result of biofuels (OECD, 2008,

Rising Food Prices, Causes and Consequences).

40% Proportion of US maize harvest

used for bioethanol production

242% Increase in the amount of land

dedicated to biofuel by 2030

20-50% Percentage rise in food prices

between 2008 and 2016

_________________________________________________________________________________

2.6 Availability of Farmland

Current and future volume of productive

agricultural land will ultimately dictate the

volume of food crops produced, yet in spite of

increasing demand for food, feed and fuel, a

host of factors including urbanisation, soil

degradation and climate driven weather events

all in some way prevent expansion of current

cropland area, meaning existing assets are

again likely to become more valuable as they

cannot be replaced.

Urbanisation

Urban development is increasing rapidly along

with accompanying transport, industrial and

other infrastructure. In 2007 the planet

reached an urbanisation milestone with more

than 50% of the global population living in

urban as opposed to rural areas. Exacerbating

matters further is the fact that settlements

primarily occur at the cost of cropland as they

tend to develop around the most agriculturally

productive locations. (Maizel et al., 1998,

Historical interrelationships between

population settlement and farmland in the

conterminous United States, 1790 to 1990).

The United Nations medium population

growth variant forecasts an increase of the

global urban population from 2.9 billion

people in 2000 to 5 billion in 2030 and 6.4

billion in 2050. Based on these figures, the

HYDE methodology, one of the most

respected land use forecasting models,

predicts that the size of built-up areas is likely

to increase by roughly 80% between 2000 and

2030, and 134% by 2050 (Klein, Goldewijk K.

and Beusen, A., 2009, Long-term dynamic

modelling of global population and built-up

area in a spatially explicit way). This

corresponds to roughly 500,000 km2, 900,000

km2 and 1.17 million km2 respectively, in other

words, if all of the forecast expansion in built-

up area were to be at the expense of cropland,

a total of 40 million hectares of cropland

would be lost by 2030, and another 27 million

by 2050 (Stehfest et al. (2008). Climate benefits

of changing diet, Climatic Change, in press).

This is a total of 670,000 km2, an area of land

849 times the size of New York City, 424 times

the size of Greater London, 1.2 times the size

of France and just under 3 times the size of the

United Kingdom.

China alone lost more than 14.5 million ha of

arable land to urbanisation between 1979 and

1995 (ICIMOD (2008). Food Security in the

Hindu Kush-Himalayan Region. ICIMOD,

Chengdu).

As urban sprawl continues to consume and

destroy agricultural assets, the value of existing

productive farmland will continue to rise.

14.5 million Hectares of farmland lost to

urbanisation in China 1979-1995

35,000Km Amount of farmland lost to soil

degradation every year

3 Number of United Kingdoms in

farmland volume lost by 2050

_________________________________________________________________________________

Soil Degradation

Degradation of soil is also a major contributory

factor limiting farmland expansion. To date,

deforestation and inappropriate agricultural

practices have resulted in approximately 2

billion hectares of agricultural land becoming

degraded (Pinstrup-Andersen, P. and Pandya-

Lorch, R., 1998, Food security and sustainable

use of natural resources: A 2020 Vision,

Ecological Economics). This includes an

absolute decline, measured by satellite

imagery between 1981 and 2003, of 12% of

the global productive land area (Bai et al.,

2007, Land cover change and soil fertility

decline in tropical regions. Turkish Journal of

Agriculture and Forestry). Some estimates

suggest that at current rates up to 30% of all

agricultural land will be unusable by 2020

(Investment and Pensions Europe, 2007, The

answer lies in the soil. Spotlight on:

Alternatives).

Annually, the global rate of land degradation,

which is due chiefly to soil erosion, is

estimated to be between 20,000 and 50,000

km2. To put this in perspective, taking an

average annual loss rate of 35,000 km2

equates to 95 km2 per day or 1,109 m2 per

second. This means an area roughly the size of

Tokyo, Singapore or New York City is lost every

week or one International Football Association

standard size football pitch every 7 seconds.

Also, due to overgrazing, compaction and

erosion from livestock, some 70% of all grazing

land in dry areas is considered degraded (FAO,

2006, Livestock’s long shadow).

As a February 2009 report by the United

Nations on the worsening global food crisis

puts it:

“Environmental degradation and loss of

ecosystem services will directly affect pests

(weeds, insects and pathogens), soil erosion

and nutrient depletion, growing conditions

through climate and weather, as well as

available water for irrigation through impacts

on rainfall and ground and surface water.

These are factors that individually could

account for over 50% in loss of the yield in a

given ‘bad’ year.”

_________________________________________________________________________________

2. Investment Characteristics

Farmland assets display a number of investment characteristics that are particularly appealing under

prevailing market conditions. Values have been shown to increase at a faster pace than the rate of

inflation; values have proven resilient under all market conditions; and investment returns have been

shown to show a low or even negative correlation with the performance of traditional investment

assets.

As farmland values are supported for the most part by a growing demand for the commodities

produced, Institutional Investors acquire farmland as a safe, long-term investment asset that

generates income and is unlikely to depreciate when the value of other investments fall.

3.1 Capital Preservation Tool

The period 2007 to present has caused

Investors of all shapes and sizes to place a

greater emphasis on preservation of capital

during periods of volatility. Agricultural land is

a solid, physical asset in finite supply which has

an essential function and is unlikely therefore

to lose value as a result of poorly performing

financial markets.

Provided sufficient due diligence is undertaken

at the point of acquisition, farmland is immune

to theft or fraud, and studies have shown that

even taking into account the transaction costs

associated with property transactions,

farmland still constituted a substantial portion

of the optimal portfolio across a wide range of

scenarios. (Webb, J.R. & J.H. Ruben, 1988, The

Effect of Alternative Return Measures on

Restricted Mixed-Asset Portfolios. Journal of

the American Real Estate and Urban Economics

Association (16): 123-37).

Data shows that agricultural land retains

capital value over prolonged periods of time.

Unlike other natural resource investments like

mining or oil & gas, well managed agricultural

land is a renewable resource which remains

productive in perpetuity.

3.2 Farmland as an Inflation Hedge

The investment performance of agricultural

assets shares a positive correlation with

inflation, making farmland an effective hedge

against the effect of inflation of the value of

investment portfolios. Between 1941 and

2002, average farmland values increased by

almost two per cent more than the average

rate of inflation over that time period.

(Hancock Agricultural Investment Group,

2009).

With the UK Retail [Index (RPI) currently 5%

(December 2011) inflation hedge investments

are especially appealing to investors

concerned about inflationary government

policies such as low interest rates and

quantitative easing prevalent under current

market conditions in many of the world’s

economies. Unlike other popular hedges

against inflation, such as precious metals,

farmland also provides a regular income to the

investor. This makes it a useful replacement for

lost risk-free income on cash deposits.

Most asset classes with exposure to

commodities such as energy, food or timber

will show some correlation to the rate of

inflation.

_________________________________________________________________________________

3.3 Income

Farmland investments generate income for

investors either through lease payments

collected from tenant farmers, or as a

percentage of harvest revenues under a joint-

venture between landowner and farming

operator known as a Contract Farming

Agreement (CFA). Farmland enjoys a near

100% tenant occupancy rate as demand for

quality farmland is always high, regardless of

the economic environment; ensuring farmland

incomes remain stable throughout all market

conditions further dissipating income volatility

within a diversified investment portfolio. CFA

arrangements carry more risk than simple

lease agreements with fixed annual payments

as the investor is exposed to commodity prices

and agricultural yields, therefore benefiting

from good times and sacrificing returns when

conditions are less attractive.

Yields vary depending on location, business

strategy and a host of other endogenous

factors that affect agricultural economics and

farmland profitability. In the United Kingdom,

average annual yields constitute only 1.66% of

land values (DEFRA, 2011), whilst in other

markets where asset prices are lower, rental

yields can stretch to 8%.

Under perfect circumstances, Contract Farming

Agreements can generate annual yields of up

to 20% in many regions including Australia,

Latin America, Africa and Asia, whilst in less

than perfect conditions it is possible for

investors to turn a negative yield if harvest

revenues are insufficient to cover the cost of

inputs and labour.

3.4 Superior Total Returns

Agricultural land captures both operating

profits and capital growth through a

combination of rental income and appreciation

in the value of the asset. When taking into

account total returns, the investment

performance of farmland has repeatedly

outperformed mainstream assets including

stocks, bonds and commercial real estate

across a wide range of markets and

timescale's, despite relatively low levels of risk

(measured in terms of the standard deviation

of annual rates of return).

Further information on the investment

performance of farmland in key global regions;

refer to the Investment Performance section of

this document.

_________________________________________________________________________________

3.5 Recessionary Hedge

Both capital values and income streams

associated with prime agricultural assets have

remained relatively stable throughout history.

Historically, land (and agriculture in general)

has repeatedly benefited from ‘flight to

quality’ investment behaviour. It performs

comparatively well during times of market

uncertainty, thus acting as an ideal

recessionary hedge. As the title of an

Economist article published in March 2009

puts it, “No matter how bad things get,

people still need to eat” (The Economist,

2009, Green Shoots, The Economist News

Article).

According to estate agent Savills’ Agricultural

Land Market Survey 2011:

“Over the past three years, farming and

forestry have topped the investment

performance league in the UK. The stable

returns from agricultural property during the

past few years clearly show the recession proof

nature of this asset and its value in inflationary

environments.”

(Savills Agricultural Land Market Survey 2011)

A further study on US farmland conducted in

2002 compared the effects on portfolio

efficiency of including farmland in a mixed

asset portfolio under market conditions of

certainty and uncertainty. It concluded that, in

both certain and uncertain world models,

farmland can be shown to improve portfolio

efficiency (Hardin, W. and Cheng, P., 2002,

Farmland Investment Under Conditions of

Certainty and Uncertainty. Journal of Real

Estate Finance and Economics).

3.6 Portfolio diversification

A number of studies have shown that,

historically, farmland returns have a low or

negative correlation with traditional asset

classes such as stocks and bonds and only a

modest positive correlation with commercial

real estate.

A study in the US, using data over a period of

33 years up to the 1980’s, considered six

asset classes including farm real estate, large

and small capitalisation stocks, long-term

corporate bonds and Treasury bills. The study

concluded that inclusion of farmland in the

portfolio had highly attractive characteristics,

particularly in view of the low correlation with

other assets in the portfolio, especially large

capitalisation stocks (343 Ibbotson Associates,

1991, Stocks, Bonds, Bills, and Inflation: 1991

Yearbook).

These characteristics make farmland an

attractive diversification tool that can help

reduce the impact of broader market volatility

on a diversified portfolio. The farmland

component can be further diversified by

varying crop types, management styles and

geographic distribution within the portfolio. In

a direct ownership structure, investors can

acquire farmland across a range of farms in

different countries and/or climate zones and

under different asset managers.

_________________________________________________________________________________

3.7 Simple and Secure

Property transactions tend to be more

transparent than financial investments, with

accurate asset valuations easily obtainable, and

retention of title providing total capital

security.

In an environment of bankruptcies, accounting

irregularity, corporate fraud, complex and

opaque investment structures and extortionate

fees charged by underperforming investment

managers, the simplicity of direct or beneficial

freehold ownership of renewable resources has

a refreshing appeal amongst the investing

community.

3.8 Tax efficiency

In many parts of the world, including many

developed economies, there are a range of tax

related incentives associated with agricultural

properties. These may result in favourable

treatment across one or all of the standard

taxes (such as income taxes and capital gains

taxes) which would normally have an adverse

effect on returns in other asset classes. In some

instances there are also special exemptions

with respect to inheritance tax which may

make farmland particularly attractive for estate

planning purposes. Some countries have

additional incentives for forestry related usage

of farmland.

_________________________________________________________________________________

4. Investment Performance

As previously mentioned within this document, farmland investments capture both capital growth and

income. Lower but more stable income is achieved through rentals, and higher, but potentially more

volatile returns are achieved through exposure to harvest revenues as part of a joint venture. Farmland

returns in emerging markets also tend to outperform more mature markets due to lower asset prices,

lower labour costs and in many cases, more fertile land and better growing conditions.

In the developed world, a range of official indices track the performance of farmland as an asset class,

considering both income and growth, whilst information in emerging markets is often incomplete and

less reliable.

4.1 United Kingdom

The investment performance of agricultural

land in the United Kingdom has outpaced that

of a number of other assets, delivering a

higher return with less volatility. In fact,

according to research undertaken by Savills,

leased agricultural land generated an average

return of 14% per year over 15 years with

volatility indicators of only 8%, whereas

equities generated a return of only 8% per

year over the same period with an associated

volatility of over 18%. (Savills Agricultural Land

Market Survey 2011)

There are a number of anecdotal indices

published by rural estate agents that indicate

land values; however the most relevant

measure of the investment performance of

operated agricultural land in the United

Kingdom outside of the Land Registry is the

IPD UK Rural Investment Index.

This Index measures ungeared total returns to

direct investment in a sample of tenanted farm

land. At December 2010 the sample consisted

of 541,492 known acres of land on 488 estates

with a total capital value of just over £2.2

billion and the total return was 9.0%.

According to the Index, farmland investments

in the UK have delivered returns of 8.2% per

year on average for 30 years; 12% per year

over 5 years; and 6.3% per year over the past

three years.

8.2% Average annual UK farmland

investment returns over 30 years

12% Average annual UK farmland

investment returns over 5 years

6.3% Average annual UK farmland

investment returns over 3 years

_________________________________________________________________________________

4.2 North America

The primary measure of farmland investment

performance in the United States is the

National Council of Real Estate Investment

Fiduciaries (NCREIF) Farmland Returns Index.

The index provides investors with a measure of

the investment performance of a large pool of

individual agricultural properties acquired in

the private market for investment purposes.

According to the index, US farmland returned

8.6% in 2010, and 5.85% to quarter 3 in 2011.

Regional U.S. farmland growth figures vary

from state to state. A new report by the

Federal Reserve Bank of Kansas City showed a

12.6% increase in mountain states farmland

values over 2011.

The Minneapolis Federal Reserve Bank District

reported farmland values as of second quarter

2011 up 17% from the same period a year ago,

while the Kansas City District reports farmland

prices up 20%.

Nebraska has seen one of the largest

increases, with non-irrigated land up 30%.

Oklahoma ranchland suffered from a

prolonged drought, and values were up just

6.4%. What little value-increase there was, was

driven by oil and gas exploration.

There has been some concern amongst the

agricultural community in the United States

that land values have spiralled out of control,

with demand for assets fuelled almost entirely

by Investors seeking to diversify out of the

stock market and into tangible assets. Don

McCabe, an accredited farm manager with Soy

Capital Ag Services said recently at an

investment forum that, about 60% of all

farmland is being purchased by active

operators, with 15% purchased by nonlocal

investors, 13% by local area investors, 7% by

institutions and investment groups and 5% by

other entities.

In Canada, Farm Credit Canada (FCC) monitors

the value of a basket of 245 benchmark farm

properties every six months. On average,

Canadian farmland increased 7.4% in the first

six months of 2011, and 9.5% for the year

ending June 2011. Saskatchewan farmland led

the nation in farmland price increases, up

11.6% in the six months ending in June, and up

14.3% year on year.

New York-based TIAA-CREF, the largest U.S.

pension manager for teachers and academic

researchers with $469 billion of assets said in

October 2011 that farmland investments may

return 8% to 12% per year as global food

demand increases. The company has $2.5

billion invested in farmland and owns about

600,000 hectares.

10.8 % Average annual US farmland

investment returns over 19 years

7.4% Increase in Canadian farm values

in the first six month of 2011

5.85% Increase in US farmland values to

Q3 in 2011

_________________________________________________________________________________

4.3 Latin America

Emerging markets in Latin America offer

farmland investors by one of the best

opportunities to capture capital growth and

income from farmland investments, down in

no small part to the ideal growing climate

found in Latin America, as well as improving

infrastructure and proximity to high demand

growth markets in emerging economies in the

region.

Argentina offers one of the largest stocks of

underutilised quality land in the world, and

opportunities exist for greenfield development

projects involving the development of unused

land with on-site infrastructure, storage

facilities, roads and irrigation. Substantial

capital value can be added, and double-

harvesting combined with low labour costs

increases operational profitability, with yields

of 10 to 15% possible with the right land.

According to The Knight Frank International

Farmland Index, farmland values in Argentina

rose by 10% in 2010, and anecdotal evidence

from consultants and land agents dealing in

the region indicates that values have

continued to rise at a similar pace throughout

2011 although growth rates vary between

provinces.

In Brazil, anecdotal evidence suggests that

farmland values have risen by around 10 - 15%

in 2011. Brazilian cotton-to-corn farming

group SLC Agricola stated recently that an

independent valuation of their land portfolio

indicated an underlying 12 month capital

growth rate of 15%.

Elsewhere in the region, land values in

Uruguay have risen sharply on the back on

increased interest from Investors and farmers

from Argentina and Brazil looking to expand

operations and diversify out risk.

Latin America remains the focus of institutional

investors too. Adecagro, the leading South

American agriculture investment business led

by legendary investor George Soros recently

acquired a 4,960 hectare farm named "El

Colorado", located in the region of Bandera, in

the province of Santiago del Estero, Argentina,

for a total price of US$18.0 million in late 2011.

11 % Average increase in Argentinian

farmland values in 2011

10-15% Average increase in Brazilian

farmland values in 2011

_________________________________________________________________________________

4.4 Europe

Farmland values across emerging economies

in Europe continued to perform well during

2011 as increased investor appetite for

productive agricultural assets, as well as active

agriculture investment policies from China and

Arab states who are interested in bolstering

food security has provided stable short-term

pricing support.

Throughout Europe there is little data available

to effectively measure the performance of

farmland investments; one must then rely on

anecdotal evidence supplied by land agents

and agribusinesses in the region.

There remains substantial growth potential in

the region; in Romania for example, which

joined the EU in 2007, farmland can be bought

for between €2,000 - €3,500 per hectare – up

to 40 times cheaper than in parts of Western

Europe. (Daily Telegraph, 2011, Rich pickings

from Eastern Europe's farmlands).

According to Valeriu Tabara; Romanian

Minister of Agriculture and Rural Development

(MADR), foreigners currently own more than

700,000 hectares of agricultural area in

Romania, representing 8.5% of the total arable

land.

“The agricultural land owned by the

foreigners in Romania at the moment is more

than 700,000 hectares, with Italy having

24.29% of the surface, Germany 15.48% and

the Arab countries, 9.9%. The request to buy

agricultural land is a developing

phenomenon,”Tabara said.

According to the data revealed by the minister,

other countries with significant participations

are Austria with 6.13%, Spain with 6.2%,

Denmark with 4.25%, the Netherlands with

2.4%, Hungary with 8.17%, Greece with 2.4%

and Turkey with 0.78%, whereas Malta, Cyprus,

Monaco, San Marino and Luxembourg have

acquired 5.91% of Romania’s agricultural

land through offshore companies. Land owners

in Iraq, Lebanon, Syria and Iran are present

from the Arab world.

In a recent paper published by Institute for

Economic Research and Policy Consulting,

farmland values in the Ukraine were assessed

using the income capitalization approach to

farmland price estimation. Based on the actual

land productivity (gross margins) for Ukrainian

farms over the period of 2007-2009,

researchers found that a hectare of arable land

would be traded from 1500 UAH (Zakarpattia)

to 5500 UAH (Kirovohrad). If the sub sample of

top-25% performing farms was to be

considered, the maximum land value will

increase to around 6800 UAH or $860 USD

(Oleh Nivevskiy & Serhiy Kandul, 2011, The

Value of Farmland - Expected Farmland Prices

in Ukraine after lifting the Moratorium on

Farmland Sales, Institute for Economic

Research and Policy Consulting).

It is widely expected that farmland values in

the Ukraine will continue to rise as the number

of investors keen to access the productivity

potential of the country’s black earth rises.

In recent years there has been a proliferation

of investment schemes based on the

cultivation of Ukrainian farmland, with notable

one scheme collapsing entirely and another

offering land parcels for an extortionate price

of $2,325 (USD) per hectare. This represents a

potential ‘land-banking’ style mark-up of

1,130% at worst, and 170% at best.

_________________________________________________________________________________

Elsewhere in the region, a hectare of

agricultural land in Hungary, Poland or the

Czech Republic is priced between €5,500 and

€7,000 demonstrating a continued upward

trend in values throughout 2011.

Investors considering farmland as an

investment should seek independent advice

from an experienced professional before

participating in any investment project based

on the acquisition and cultivation of

agricultural assets. DGC Asset Management

offers, advice, research, due diligence and

opportunities to invest in prime agricultural

assets in key global regions.

For more information about current

opportunities, contact the Management Team

at DGC Asset Management.

10 % Average increase in Ukraine farm

lease values in 2011

12-20% Average increase in Romanian

farmland values in 2011

8.65% Volume of Romanian farmland

owned by overseas Investors

_________________________________________________________________________________

4.5 Asia

It is quite impossible to provide a complete

review of the investment performance of

farmland across the entirety of the Asian

continent within the context of this document.

Reporting in many countries is unreliable and

the majority of transactions are conducted at

either subsistence farmer or governmental

level where the flow of information is poor, if

not non-existent.

During the compilation of market data and

evidence for the purpose of publication in this

document, the Management Team at DGC

Asset Management have conducted interviews

with institutional investors, government

officials and agribusiness operators in Asia in

order to establish the state of the investing

landscape within the various farmland markets

in the region.

It became quite clear during this research-led

process that the data simply doesn’t exist in

any reliable format to ascertain precise

farmland values or farmland investment

returns in the majority of countries

investigated. In fact it is often true to say that

recent interest from institutional investors is

forming the basis of a previously non-existent

agricultural property market in many of the

countries surveyed. It seems that the capital

value of farmland assets that form part of

larger institutional investment are assessed

using an income capitalisation model, taking

into account the cost of establishing a modern

agricultural operation on the land, weighed

against the projected revenues from

harvesting.

In 2011, the Asian farmland market has

continued to capture the focus of sovereign

investors motivated by food security rather

than investors seeking financial returns.

For example, the Kuwait Investment Authority

(KIA) have been targeting farmland

investments in Asia, notably in Vietnam,

Cambodia and Laos via a specially established

investment vehicle; the Kuwait China

Investment Co (KCIC). The KCIS was

established in 2005 with a capital of 80 million

dinars ($278.7 million) and has approached

governments in Vietnam, Cambodia and Laos

according to Faisal Nawaz, Chief Financial

Officer at the firm.

The investing environment in Asia can be

obstructive in certain countries however. When

KIC sought to acquire rice farming land in

Cambodia directly through the central

Government it provoked widespread resistance

amongst the population.

The Qatar Investment Authority (QIA) has joint

venture funds investing in farmland in

Indonesia, Vietnam, Malaysia and the

Philippines (Indiana University, 2009, Land grab

or development opportunity? Agricultural

investment and international land deals in

Africa).

The United Arab Emirates (UAE) also plans to

invest up to $700 billion in East Asia as it seeks

to disperse the huge profits made from its oil

industry. Abu Dhabi’s Al Dahra Agricultural

Company is halfway through a plan involving

more than 60,700 hectares of farmland in

Europe, the US, South Asia and North Africa in

order to boost the food security for the state.

The entire plan encompasses an investment of

Dh1 billion (US$272.2 million). The holdings

include 4,050 hectares in Pakistan, which will

rise to 10,100 hectares in the next two years.

_________________________________________________________________________________

4.6 Africa

African farmland is very high on the agenda

both of sovereign investors seeking to sure up

domestic food supplies, and financial investors

seeking superior returns. Whilst risk certainly

features heavily in the African land market,

especially concerning productive agricultural

land, it is true to say that there is substantial

profit potential for those prepared to take on

board some extra risk.

Ample opportunities exist for greenfield

developments in Africa, with large tracts of

suitable land yet to be cultivated, whilst

improved infrastructure and modern

agricultural practices improve on-farm

profitability and reduce losses due to poor

storage and transport facilities.

The introduction of modern irrigation systems

can dramatically improve the capital value of

suitable land assets as well as productivity and

yield. In South Africa, irrigated land traded for

R$10,000 per hectare in 2011, whilst equivalent

dry-land achieved only R$2,000. The same

trend can be seen in every African nation that

allows direct farmland ownership creating

opportunities for Investors capable of

delivering infrastructure improvements on the

ground. Ample opportunities also exist to

improve agricultural practices including soil

management and improvements taking

advantage of excellent fertile soils and

improving profitability.

Demand for agricultural products is expected

to be especially strong in Africa, as UN

population growth figures show the African

population expanding by 107% between 2007

and 2050 against a global average growth rate

of 30%, and only 2% in high income countries.

Emergent Asset Management, a boutique UK-

based fund manager is investing heavily in

African farmland and is targeting investment

returns of up to 25% per year. Emergent will

not discuss its exact size of their fund;

according to some sources however, the figure

is close to $540 million (Oakland Institute,

2001, Deciphering Emergents Investments in

Africa).

In 2008 South Korean firm, Daewoo Logistics,

signed a 99-year lease on 3.2 million acres,

nearly half of the country’s arable land in

order to grow 5 million tonnes of corn and

500,000 tonnes of palm oil per year, and had

intended to spend approximately $6 billion

over 20 years on supporting infrastructure. The

deal generated controversy amongst the

population as many viewed the deal, which

was negotiated behind closed doors, as yet

more evidence of poor governance and a

violation of the country’s constitution. The

deal fuelled anti-government protests that had

already been occurring in the country. In

March 2009, a military-backed coupd’etat

forced the resignation of President Marc

Ravalomana, and the newly installed leader

Andry Rajoelina subsequently cancelled

Daewoo’s contract.

_________________________________________________________________________________

4.7 Australia and New Zealand

The Australasian continent has been a key

focus for institutional investors and sovereign-

backed investment vehicles throughout 2011,

and remains a distinct area of interest moving

into 2012. In particular, state-led acquisitions

of farms and agricultural businesses in

Australia and New Zealand have been so

prevalent throughout the year that they have

become leading political issues with both

countries currently viewing their foreign

investment control policies.

Beidahuang Group (BDH Group), China’s

largest grain producer is looking to add to an

already long list of overseas farmland

investments with the purchase of about 80,000

hectares of farmland in Western Australia with

several farmers understood to be on the verge

of signing.

Then International Grain Council recently

announced that Qatar, via the state-owned

Hassad has committed to spending half a

billion Australian dollars on acquiring farmland

in Australia to supply grain and other food to

its people. The investment vehicle has

committed the equivalent of $484 million to

buying 186,000 hectares of farmland in

Australia. Most of the acquired land is located

in the eastern part of the country. A separate

entity, named Hassad Australia, has been in

operation for several years as part of this food-

sourcing program. The agricultural research

body ABARES forecast the largest Australian

winter crop on record of 43.4 million tonnes.

A number of investment funds, both domestic

and overseas have sprung up during the year;

The Sustainable Agriculture Fund (SAF) is an

unlisted investment fund which owns and

operates farms throughout Australia and is

thought to be worth some $145 million AUD.

Meanwhile in New Zealand, Chinese company

Pengxin International is trying to buy a large

dairy operation, namely Crafar Farms for $200

million New Zealand dollars. Both the Overseas

Investment Office and the Prime Minister are

currently considering the deal amidst much

public denouncement of the purchase as a

resources grab.

In terms of the investment performance of

farmland assets in 2011, evidence from Land

Agents and investment consultants souring

farms for institutional investors, an income

capitalisation approach is the preferred

method of valuation for Investors, and this

year’s bumper wheat harvest is likely to

generate superior farm revenues against a

backdrop of high demand from overseas

grains buyers and limited supplies form other

key growing regions.

3 % Average increase in Australian

farmland values in 2011

12% Average yield from a Western

Australian wheat farm in 2011

11% Volume of Australian farmland

owned by overseas Investors

_________________________________________________________________________________

5. Investment Strategies

Whether choosing to invest in farmland directly, or via a managed investment vehicle such as a Real

Estate Investment Trust (REIT) or farmland investment fund, there are two underlying investment

strategies to consider when approaching productive agricultural land as an alternative investment

asset class.

Investors seeking capital preservation, income and an inflation hedge may best consider acquiring

suitable productive land and leasing to a farming tenant, and those with a little more appetite for risk

may further choose to share in the profits - and any potential losses - at harvesting.

For those investors seeking to generate superior investment returns, greenfield developments

involving the development and cultivation of previously unutilised land may seem more appropriate

as substantial capital value can be added through on-site soil preparation and infrastructure

investments, whilst long-term revenue is capturing through on-going cultivation of a range of crops.

In both cases, Investors must also consider the operational strategy, including the type of crops

grown, whether food crops for human consumption, or as feedstock for biofuel production, or even

permanent crops such as vines, or oil producing trees for biodiesel production. In most cases the most

profitable crops with acceptable risk parameters will ultimately win the competition for production on

arable land.

_________________________________________________________________________________

5.1 Let Land

The most simplistic and lowest risk approach

to farmland investing is the identification and

acquisition of agricultural land, and leasing the

asset to a tenant farmer for a fixed annual

income, often linked to inflation or periodically

reviewed.

Rental rates vary from region to region, and

ultimately depend on the productivity and

profitability of that specific holding. Farmers

are willing to pay higher rents for more

productive land; or land that is in close

proximity to a guaranteed water supply and/or

storage and transport infrastructure.

According to DEFRA in the United Kingdom,

average rental rates for farmland leased under

a Full Agricultural Tenancy (FAT) generated

rents of between £130 and £150 per hectare.

Whereas land leased under a Farm Business

Tenancy (FBT) agreement generated £160 per

hectare. Across all non-seasonal rental

agreements, the average annual income per

hectare was £146 (DEFRA, 2011, Farm Rents

2009).

When it is considered that the average price of

farmland in the UK is £13,832 per hectare,

leased land generates an average cash yield of

just 1%, barely enough to cover management

fees charged by rural estate agents (Savills,

autumn 2011, Farmland Market Q3).

Let land in the UK is therefore best utilised as a

capital preservation and inflation hedging tool

to diversify an investment portfolio and

underscore some of the value with tangible

assets that are unlikely to suffer long-term

depreciation. Furthermore, generous tax

incentives also provide opportunities for

Investors and Financial Planners to optimise

the tax efficiencies of their portfolios.

In the United States, the 7th Federal Reserve

District's First Quarter 2011 report on Farmland

values and credit conditions showed that

district cash rental rates for agricultural land in

2011 jumped 16% higher compared with 2010.

In Iowa State, corn and soybean land

generated cash rents of $528 per hectare in

2011, compared with $365 per hectare in 2007,

representing a gross yield of 3.9% when

considering the average value of cropping or

pasture land was $5,426 as of September 2011

(Iowa State Extension Service | Iowa State

University, 2011, Sept 2011 Farmland Survey).

In Western Australia, one of the world’s key

wheat growing regions, good quality arable

land rents for up to 6% of the asset value per

year, whilst some superior livestock stations

can achieve up to 8%.

1% Average annual rental yield from

UK farmland

3.9% Average annual rental yield from

Iowa State farmland

5-8% Rental yield range for Western

Australian farmland

_________________________________________________________________________________

5.2 Greenfield Developments

Investors seeking to generate superior capital

growth and income opportunities might

consider that developing land with agricultural

potential can generate appreciation in the

capital value of the asset, whilst also

generating an on-going operational or lease

income.

Such investment strategies have been

employed by some of the world’s most

successful investors, including Jim Rogers,

whose farmland investment vehicle Agrifirma

owns 69,188 hectares of land in Brazil. The

firm’s investment strategy involves

developing agricultural properties to add

capital value, then capturing income through

on-going operations.

According to the Agrifirma’s website:

“Agrifirma’s objective is to devote capital

and expertise to developing profitable and

productive farms in the Cerrados region of

Brazil. The transformation process involves

land clearance, soil preparation, crop planning

and expert execution to achieve globally

competitive yields.”

Elsewhere, George Soros investment vehicle

Adecoagro’s recent $18 million purchase of

4,960 hectares of farmland in Santiago Del

Estero province in Argentina will involve

conversion of 1,820 hectares of pasture land

into productive cereal land adding capital

values and capitalising on high cereal

commodity prices and increasing demand for

animal feed in emerging economies.

DGC Asset Management offer Investors the

opportunity to participate in a greenfield

farmland development with a track record

dating back to 2007, having generated annual

cash payments for Investors of more than 10%

each year since.

For more information about this opportunity,

please contact the Management Team at DGC

Asset Management.

Such developments, especially in emerging

markets where there is still virgin land to be

exploited, and favourable growing conditions,

provide investors with an opportunity to

‘decorrelate’ a portion of their investment

returns from the performance of traditional

investment assets during period of extreme

market volatility.

Often, the value of developed agricultural land

can increase by up to 500%, although taking

into account the cost of conversion, net gains

amount to circa. 100% depending heavily on

the specific nature of the project, its location

and a host of other endogenous variables.

Also, geo-political risk must be considered a

factor in most emerging markets including

Latin America, Asia and Africa.

10.2% Average annual return since

2007 from DGC farmland

100% Net capital gains from the

development of greenfield sites

_________________________________________________________________________________

6. Risks

Whilst the investment performance of farmland has historically been less volatile than traditional

assets like equities, it is important for Investors to recognise that farmland investments, like all

investments, carry risks that are specific to the asset class.

Statistics cannot wholly express these risks. As such, in addition to quantitative risk analysis one

should also assess risk qualitatively. Any investor considering farmland investments as part of a

balanced and diversified investment portfolio should make efforts to ensure that they are familiar with

the risks involved in farmland investments.

Risks involved in owning farmland properties can be separated into two broad categories:

Endogenous Risks – Those risks having an internal origin relating to specific crops, on-site

management and site location.

Exogenous Risks – Those risks having an external origin such as commodity prices, extreme climatic

events and international trade policies.

Whilst risks cannot be eliminated, both endogenous and exogenous risks can be managed and

mitigated through proper planning and execution.

DGC Asset Management Ltd is most able to add value to Clients through the application of a

screening process during asset selection. DGC differentiates itself from the conventional by the quality

of its risk awareness and risk management processes.

_________________________________________________________________________________

6.1 General Investment Risk

As with any investment asset, the value of

agricultural land can and will fall and rise in the

short-term as commodity prices, local

availability and agricultural yield all impact

current market values. Whilst strong demand

fundamentals underpin future farmland value

growth, should land values fall significantly

then the performance of farmland investments

may suffer. Farmland should be viewed as a

mid to long-term hold, affording investors the

opportunity to ride out any potential short-

term price volatility. Farmland investment

should be approached as simple property

investments based on the acquisition of an

asset that has a market price at any given

moment. The fundamentals supporting

farmland prices in the long-term are solid, and

it is unlikely that farmland value will depreciate

over an extended timeline.

6.2 Commodity Prices

Commodity trading markets are famed for

their volatility, and farmland investments are

exposed to commodity prices in various ways.

Obviously the price of crops is a key driver of

agricultural economics, but also the cost of

fuel, labour and other commodity based inputs

such as fertilisers may also have a bearing on

the cost of generating income from productive

land, effectively squeezing the profit margin of

a property as the cost of production rises. If

high fuel and/or labour prices were to

combine with a dip in soft-commodity prices,

it may make harvesting prohibitively expensive,

exposing the farmer/investor to a loss of

income. Varying crop choice across a range of

commodities helps to dissipate this risk, as

does diversifying out into a range of different

properties/investment vehicles.

6.3 General Agricultural Risk

Farmland ownership, at some level, involves

exposure to the business of agricultural

production, either through direct operations,

or through Contract Farming Agreements or

lease payments from tenant farmer. Events

that could bear impact on the success or

failure of a farmland investment could include,

but are not necessarily limited to; freak

weather conditions, such as floods, droughts,

undesirable rainfall, hail, frost or

uncharacteristic cold spells; weeds, pests and

diseases; fire, and the possibility of generally

worsening conditions associated with climate

change. Any of these factors individually or in

combination, may have adverse consequences

on incomes and/or values. In most developed

markets, and some emerging markets, farming

operators can insure against many of the risks

associated with agriculture.

6.4 Geographic Risk

The climates most conducive to optimal

agricultural productivity are often to be found

in the developing world where both legal and

logistical infrastructure may not be as

developed as in 'the West'. Whilst emerging

market investments do by definition carry a

greater risk, the agriculture sectors in some of

the major Latin American and Asian economies

are actually extremely well developed and

transparent, allowing Investors to defend title

and avoid poor reliability within the judicial

system. As a foreign Investor, especially an

Investor in the productive agricultural assets of

another country, caution should be exercised

to ensure that the legal structure of ownership

does not expose the Investor to any

restrictions or penalties in terms of income or

taxation or indeed disposal.

_________________________________________________________________________________

6.5 Liquidity Risk

Direct farmland investments are relatively

illiquid under certain market conditions.

Commercially viable agricultural properties

tend to be large estates, often spanning

hundreds or even thousands of hectares, and

buyers for these kinds of properties may take

some time to source, and negotiations and

due diligence including surveys, valuations and

cash-flow analysis may take months to

complete. Investors seeking exposure to

agriculture but also requiring liquidity may

consider purchasing shares in an investment

vehicle such as a Timber Investment

Management Organisation (TIMO) or Real

Estate Investment Trust (REIT), which can be

traded on a public exchange. This strategy

however immediately exposes the Investor to

the very market risk (volatility) he or she was

trying to avoid.

6.6 Regulatory Risk

In line with geographic risk already discussed

on this page, farming income may be

impacted by changes in the regulatory

environment of a particular region. New

legislation may adversely affect income

through price control, export restrictions or the

imposition of duties. Governments may also

impose more stringent environmental

regulations upon the agriculture sector thus

increasing compliance costs with possible

negative consequences for farmland

profitability. There is also the possibility of

governments imposing limitations on the

volume of agricultural land that can be owned

by overseas investors. Indeed we have seen

such measures introduced across the world in

2011, not least in Brazil which now limits

foreign ownership of farmland.

6.7 Inflation / Deflation Risk

Inflation or deflation may occur over the

duration of your investment. If the returns on

your investment are lower than the rate of

inflation this would result in a reduction in the

spending power of the funds realised upon the

sale of your investment relative to the

spending power you might otherwise have

achieved had you simply held cash. Farmland

investments have been shown to share a

strong correlation with inflation, which makes

the asset class particularly attractive to those

individuals who expect to see extended

periods of high inflation due to quantitative

easing (money printing) population expansion

and resource scarcity, all of which have

historically driven inflation up. According to

the Hancock Agricultural Group, US farmland

values have outperformed inflation by an

annual average of 2% for 30 years.

6.8 Currency Risk

Farmland investments may be subject to

currency risk, especially if the property is in a

different global location to that of the Investor.

It is likely that farm revenues will be

denominated in the domestic currency, unless

the operation is exporting, in which case trade

is likely to be denominated in USD$. An

Investor purchasing farmland in Australia

would generate income in AUD$, which would

require converting to GBP Sterling before

repatriation to the UK. If the value of the AUD$

were to fall, the Investor could end up with

diminishing returns in real terms. Currency

exposure is becoming an increasingly

important consideration for investors as

uncertainty over the global economy continues

into 2012, and proper hedging should be

undertaken in order to minimise currency risk

exposure in farmland investments.

_________________________________________________________________________________

6.9 Counterparty Risk

The average Investor is unlikely to have the

knowledge and/or experience to identify,

assess, acquire, manage and dispose of

suitable agricultural. It is mostly then going to

be the case that the Investor must use an

Agent capable of working autonomously to

manage the property for efficient economic

benefit.

The majority of risk involved in farmland

investments can be diminished substantially

through proper site and species selection, a

process requiring detailed knowledge of

farmland topography, and operational

knowledge to avoid landslide and erosion-

prone areas. Insufficient infrastructure,

expensive access and long distances may also

determine the feasibility of a farmland

investment so exposure to a poor Agent is

likely to bear considerable risk upon the future

success of a farmland investment.

Expert knowledge is also required to develop

on-going agricultural techniques that

maximise growth, minimise losses and operate

with general economic efficiency.

6.10 Asset Specific Risk

Risk endogenous to specific properties require

specific expertise to recognise and manage.

Issues that may affect the profitability of a

farmland investment include soil quality,

topography, water availability, distance from

infrastructure and security of tenure may all

have an impact if not properly assessed,

identified and mitigated during the acquisition

process.

Agriculture professionals with experience of

land and infrastructure in the area of interest

are essential to farmland investments.

Assessing Risk in Farmland Investment

When assessing the risks associated with direct

or indirect farmland investments, one should

first consider risks specific to the sector,

location and individual asset under

consideration. Having advised on farmland

investment transactions in the United

kingdom, Australia, Asia and Latin America,

DGC Asset Management have developed a

proprietary due diligence model designed to

assess agriculture investments based on the

acquisition and operation of prime agricultural

land assets, both in emerging markets and

more developed economies.

For more information about current farmland

investment opportunities for private and

institutional investors, please contact the

management Team at DGC Asset

Management.

DGC Due Diligence Model

Investable Opportunities

Sector

Location

Asset

_________________________________________________________________________________

7. Summary

Productive agricultural land offers certain

Investors the opportunity to diversify and

optimise a well-balanced investment portfolio,

whilst also generating superior long-term

investment returns without the added volatility

associated with traditional asset classes.

Opportunities for smaller Investors are limited

as competition for suitable, investable assets is

stiff. Larger tracts of productive land

ultimately offer the best value and potential to

prospective Investors as smaller paddocks

attract amenity buyers and sell for highly

inflated values when compared to large arable

estates which tend to trade for a lower price

per hectare and also generate annual income.

Besides capital adequacy, other barriers such

as the ability to identify and measure suitable

properties, and skilled management to

maximise opportunities to add capital value

and increase yield prevent smaller Investors

from participating directly in farmland

investments. This has led to a proliferation of

farmland investment schemes aimed at smaller

investors, usually based on a similar

investment model to that of the ‘Managed

Investment Schemes’ prevalent in Australia

throughout 2005 to 2008. Having assessed a

range of such schemes in the various global

regions including Europe, Latin America,

Australasia and Africa, it is the opinion of the

Authors that very few schemes offer any real

value to the Investor and, in many cases, seem

to have been structured to generate a capital

gain for the Vendor on sale to an Investor,

rather than as a mechanism to raise capital for

an on-going agricultural production project.

In the short term, agricultural land is likely to

continue to outperform other asset classes as

increased investor interest; high commodity

prices and a lack of availability converge to

provide solid underlying price support. At the

most basic level, farmland values are

supported by net farm revenues, so any fall

back in commodity prices or a substantial

increase in operational costs will squeeze

farming profit margins and likely impact land

values as assets becomes less profitable.

In the long-term, a global shortage of suitable

land which cannot be resolved, diminishing

yields, population growth and rising personal

income in developing economies will continue

to push productive land values higher.

Appetite for agricultural commodities from the

energy sector will also continue to impact the

agriculture sector, and innovative new energy

crops such as oil-producing trees offer

substantially higher margins for farmers and

Investors.

By far the most profitable opportunities lie

within the framework of greenfield

development, adding capital value through the

development of infrastructure and irrigation at

previously uncultivated sites, and collecting

superior income streams through modern

agricultural practice.

DGC Asset Management will continue to

assess measure and deliver farmland

investment opportunities throughout 2012,

and will continue to raise capital for the one

approved project currently in the company

portfolio. Due diligence is currently being

undertaken for a second option which will

allow Clients to invest directly in sustainable

agricultural production in Africa. For more

information regarding farmland investments,

or to speak to DGC about the current selection

of approved farmland investments, please

contact the management team at DGC.

_________________________________________________________________________________

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