In this letter, we take a step back from the global financial crisis to examine various agricultural investment themes: futures, equities, managed funds, ETFs and farmland. Agricultural investments have become a hot sector in recent years due to a combination of rising food prices and the perception of stability and inflation protection provided by this asset class.
From the end of WWII until 2000, the cost of food fell by half in real terms. Countertrend rises occurred in the 1970’s general price inflation and in the current period beginning in 2000 (Chart 1). The long-run deflationary trend has been driven by the expansion of tilled land, and more importantly, technological advances in crop management, mechanization, irrigation and fertilizer application. These tailwinds have now faded and demand has outstripped supply over the last five years, raising the question of whether a permanent shift in the supply/demand balance will end the deflationary trend of the post WWII period.