institutional investors such as pension funds and private equity, real estate firms and agribusinesses have adopted business models that aim to produce value from land appreciation by acquiring land, clearing it from its native vegetation and transforming it into farmland. While land prices in the Cerrado have increased nearly fivefold between 2003 and 2016, there are signs that the farmland real estate market is currently overheated.
By Gabriel Thoumi, CFA, FRM on October 16, 2017 2:06 pm in Business
As written by Chain Reaction Research, following the financial crisis of 2007-2008, there has been a growing investor interest in farmland around the world. In Brazil, this interest has been most pronounced in the Cerrado, a large tropical savanna biome that covers more than 20 percent of the country.
Here, institutional investors such as pension funds and private equity, real estate firms and agribusinesses have adopted business models that aim to produce value from land appreciation by acquiring land, clearing it from its native vegetation and transforming it into farmland. While land prices in the Cerrado have increased nearly fivefold between 2003 and 2016, there are signs that the farmland real estate market is currently overheated.
These large-scale farmland acquisitions have resulted in significant environmental and social impacts. Between 2013 and 2015, 1.9 million hectares (ha) of the Cerrado was cleared of its native vegetation. Cerrado deforestation contributed to 29 percent of Brazil’s carbon emissions. Moreover, land acquisition in Brazil is linked to a process of grilagem, whereby land deeds are falsified and later sold. Traditional communities have been impacted through forced removals, loss of hunting grounds and other livelihood impacts.
Get Our Icahn eBook!
Get our entire 10-part series on Carl Icahn and other famous investors in PDF for free! Save it to your desktop, read it on your tablet or print it! Sign up below.
email address
GET THE PDF
Timeless Reading eBook
Amazon Rainforest Stonehenge
Eirik_Raudi / Pixabay
The Cerrado
The Brazilian Cerrado is the biologically richest savanna in the world, home to hundreds of endangered species. It covers more than 20 percent of Brazil’s territory. The savanna’s native habitat and rich biodiversity are being destroyed faster than the neighboring Amazon. As the source of rivers and waterways, the Cerrado functions as a vital source of water for the region as well as many of Brazil’s largest cities. It is also home to many traditional communities that have inhabited the area prior to the agricultural expansion.
Key Findings
Financial risks: Brazil’s Cerrado region may be subject to a potentially overvalued farmland real estate market. Indications include 1) a disconnect between farmland and global commodity prices; 2) the financialization of farmland and inflationary effect of the entry of institutional investors; 3) investments moving into areas less suitable for agriculture; and 4) reduced market appetite for deforestation-related soy and other commodities.
Environmental risks: The Cerrado is one of the most environmentally sensitive areas in the world. Farmland investment models inherently drive the transformation of native Cerrado vegetation into agricultural land. This conversion contributes to increased carbon emissions, threats to biodiversity, reduced drinking water supply for Brazil’s large cities and erratic rainfall.
Social risks: Illegal land grabs can precede the acquisition of farmland by investors. Through a process known as ‘grilagem’, land is made inaccessible to traditional communities, after which property titles are forged. In several cases, such land is subsequently sold to farmland investors. Traditional communities consequently face negative livelihood impacts. This heightens the risks for violence, social unrest and litigation.
Risk might remain hidden to investors. Investors in farmland companies may be directly exposed to the risk of stranded land. Given the increased stakeholder attention to deforestation, it may become financially less attractive to transform forested land to farmland. Farmland investment firms generally do not specify whether their portfolio contains forested land.
Growing Global Interest in Farmland
Following the financial crisis of 2008, global interest in farmland has been on the rise. Land Matrix identified 26.7 million ha of farmland transferred to foreign investors between 2000 and 2016 globally (approximately two percent of all arable land worldwide). Cropland expansion can be explained by growing global food demand through population growth and rising incomes in emerging markets, biofuel mandates as well as increased global trade. Investors seeking stable financial returns have turned to the agricultural sector in response to geopolitical instability, low interest rates, and slow economic growth. In 2009, five agricultural strategy funds collectively raised USD 500 million. 2017 data suggests there are currently 51 unlisted agriculture/farmland funds, with total investments of USD 13 billion.
While direct equity or debt financing of agribusinesses is the most common type of investment in the agricultural sector, investors have increasingly turned to a strategy of direct farmland purchases. As explained by the agricultural analyst group Gro Intelligence, “an investment in agriculture and forestry is a claim on two streams of returns: the financial return from crop and harvest income and the capital appreciation of land or timber.” In 2015, TIAA-CREF, a leading US-based retirement and investment services provider, closed its USD 3 billion Global Agriculture II LLC fund, the largest farmland investment fund to date. This fund invests in farmland assets across North America, South America and Australia.
Brazil is one of the five countries with the most international acquisition of agricultural land. International investment and pension funds, as well as domestic agribusinesses and real estate firms have been buying large tracts of land. Consequently, Brazilian farmland prices have increased exponentially in recent years.
The Cerrado, one of the most environmentally sensitive biomes in the world, is at the heart of this farmland investment growth. According to 2017 data by Informa Economics FNP, a consultancy company specialized in the land market in Brazil, land prices in Brazil’s Cerrado increased nearly fivefold between 2003 and 2016 (corrected for inflation). Land holdings are highly concentrated in Matopiba; ten agribusiness and real estate firms control a total area of 1 million ha of farmland. These firms include SLC Agrícola, Agrifirma, BrasilAgro, YBY Agro, Radar, AgriInvest and Terra Santa Agro.
Farmland Investments Include Financial Risks
Institutional investors that are active in the Brazilian land market point to macroeconomic fundamentals as the basis for their investment strategy. The expected growth in global population, paired with a growing demand for protein from meat, dairy and nuts drives interest in farmland in countries such as Brazil. However, several recent trends point to the possibility that the Brazilian farmland real estate market might be ‘overheated’ and prices might be inflated. These indicators suggest potential financial risks for investors with exposure to the Brazilian farmland market, especially in the Matopiba region. The Matopiba region is shown in Figure 1 (below).
Figure 1: Matopiba, comprising of parts of Maranhão, Tocantins, Piauí and Bahia. Source: Florestal Brasil.
Figure 2: Prices of high productivity Cerrado farmlands (BRL/ha) 2003-2016, vs. global soybean prices 2003-2017 (USD/metric ton). Source: Informa Economics FNP, Index Mundi.
Farmland Prices Disconnected From Commodity Prices
A first indication is the existing imbalance between worldwide commodity prices and land prices in Brazil’s Cerrado. Between 2000-2013, there was a positive connection between land and commodity prices. As shown in Figure 2 (above), since 2011, the drop of global commodity prices from 2011 onward has not been reflected in farmland prices in the Cerrado.
Farmland Financialized; Value Appreciation of Land instead of Revenue from Production
A possible explanation for the disconnect between soy prices and farmland prices is that the drop in global soy prices has been accompanied by financialization of farmland and the entry of institutional investors in the Brazilian land market. Financialization is defined by Krippner as “a pattern of accumulation in which profit-making occurs increasingly through financial channels rather than through trade and commodity production.” In recent