The farm business may lose access to the farming land when a member of the SMSF dies, if the farmland has to be transferred out of the fund. New farmland can be placed in the fund through borrowing, but the Trust Deed must allow for this to occur and strict rules must be followed.
There is also an additional administrative burden. The investment flexibility of the SMSF can be compromised if a big, lumpy asset such as farmland is not achieving the investment goal of the fund. It is hard to convert half the farmland to another asset class that might be performing better. Also, the objectives and horizon of the SMSF may not align with that of the family farming business, which could create problems with future management and ownership transition.
Owning farmland in a SMSF may be one way to create more wealth, but the limitations of the structure need to be balanced against the benefits. Most family farmland is still commonly owned in individual or joint names. This remains a simple and versatile way of owning the most significant asset on most family farming balance sheets, especially where the business needs to expand by borrowing to acquire more land.
Home Knowledge-base Contact us. More broadly, Victorian farmland increased by The ASX long-term investing report assumes all dividends are re-invested and is net of all costs before tax. It demonstrates the impact of the GFC and ongoing market uncertainty on the long-term returns for a range of asset classes. So the update for this report will be likely to show lower gross returns than in the update, at least for the ASX. In other more recent data, Balanced managed super funds the mostly widely held super funds returned 5.
The return from farming is made up of the return on the land assets and the return on working capital. Land values traditionally rise when interest rates are low and commodity prices are high. Like all asset classes, farm land has periods of stagnation and periods of growth and decline.
However, the overall trend is for a consistent and steady increase in median values see the cropping farmland values index. It has proved to be a good investment. Figure 1: Cropping farmland values index. The other factor to include in assessing the return from farm ownership is the farm income.
If we assume that farm income is between two and five per cent, then the overall return is in the range of eight to 13 per cent. Figure 2: Range of one year returns — over the past 10 years to 30 June Source: Fidelity International. Another factor in investments markets favouring farmland is that they have a low likelihood of a negative return when including income and land appreciation and they are not correlated with other asset classes.
Compare this to some of the negative ranges of one year returns shown above experienced by other asset classes in the 10 years to 30 June - 40 per cent for Australian shares. On my recent Churchill Fellowship I investigated a range of farm models and alternatives for land tenure which balanced the returns made and risk faced from the investment in land ownership and in working capital. The most appealing model I investigated was contract farming.
While it has been used in Australia in some forms - mostly in the dairy sector - it is not common. For young farmers contract farming is far more suitable than leasing as it allows them to match the production risk faced with their financial resources. This contract farming model is a relatively new option for land tenure. In the UK, the use of contract farming is taking over from share-farming as an alternative to leasing.
The Contract Farming Agreement CFA is relatively simple and aims to avoid many of the complexities of a share-farming model or partnership. The two parties to the CFA run their own separate business with their own bank accounts, and tax administration.
The CFAs are often for cropping, but can include livestock. It is an excellent way for two businesses to manage risk and return in an agricultural enterprise in a more formal manner than the traditional share-farming agreement. A key benefit in the Australian context is that both would be primary producers for tax purposes.
The Farmer receives a small profit if conditions allow with much lower risk. There are a huge number of variations in the manner the divisible surplus is split. Another option for Australia would be to combine a number of these agreements to secure the engagement of a young farmer to work in a farm business and develop their own operation.
While attention is often focused on attracting young farmers to the industry, the key issue for many is access to farm land. Meanwhile, many older farmers cannot afford to retire or have not found a solution to their succession issues and do not want to sell their land. Leasing can solve both issues. Retiring farmers can retain the farm land, remain in their homes, and generate and income.
Planning is required for the retiring farmer to determine how this plan will develop and how much income they will require. The release of additional lease land onto the market then creates opportunities for young or new farmers to establish farm businesses or existing farmers to expand. Most of these factors will relate to the circumstances of the farm business, but we can use the Association of Superannuation Funds of Australia AFSA retirement standard to indicate the income required.
A retiring farmer can lease their land and generate an income from the land with reduced production risk while retaining all of the benefits of owning farm land. This also allows them to sell down the working capital they have built up and use the funds to reduce debt or invest off-farm. The lease can be combined with a share-farming agreement on part of the land, with the tenant allowing the retiring farmer to manage their exit from farming and the tax issues that are often created.
While the use of the land tenure models can solve issues for the landowners it also creates opportunities for other farmers:. This home will most likely continue to be the farm house. The start point is a traditional farm business on acres of owned land with an investment in working capital and some off-farm investments.
The owner is looking to retire and has no family members wanting to take over the farm, but they do not want to leave the farmhouse. If the farmer was to sell up they would have to create a diversified asset portfolio from the land sale proceeds and pay tax on the sale of livestock and the FMDs in the one year, as well as addressing the capital gains tax issues. An alternative is to lease, but in this situation they would lose their primary producer status and have the same tax issues with regards to the livestock and FMDs.
In order to maintain their primary producer status, they can share-farm some of the land with the tenant leasing the main area of the farm. After a number of years however long it takes to solve the tax issues related to selling down sheep and withdrawing the FMDs the farm business has been transformed. Working capital investments have been sold, FMDs withdrawn, debt repaid and off-farm investments increased.
At some stage the share-farming agreement can be terminated and the land leased out in its entirety. The return on the farm assets and overall assets does not include the return on the farm land asset. It shows that the leasing model has a slightly lower overall return on assets than the owner farming the land, however it carries much less production risk just the share-farming area. When the share-farming agreement has served its purpose and tax issues are resolved, all production risk can be removed by leasing the whole land area out.
However, some farmers choose to retain the share-farming agreement in this form to maintain some exposure to the upside of a good outcome! Super Ratings. Duncan Ashby About Me. Is agricultural land a good investment.
Decisions on farm land tenure: buying, leasing and the alternatives. Introduction A farm business is comprised of land and working capital, and the returns from each combine to produce the overall return to the business. Table 1: Farm business trends. Some pre-empt change, some respond to change and some have change thrust upon them modified from William Shakespeare, The Twelfth Night The farm businesses that will have change thrust upon them include all of those without the scale to regularly generate profits and the ability to create additional profits through other strategies.
A review of the Australian Bureau of Agricultural and Resource Economics ABARE Farm Survey results indicates that: most farms are small and unprofitable and these farms must not continue business as usual farm returns are very variable land values rose above trends, but are now falling back. Land tenure trends in Australian broadacre agriculture are: Leasing is five to seven per cent of farm land, but has been increasing in some areas share-farming is utilised but on a very limited scale other options are confined to a small number of farmers who are comfortable with their use from previous experience — these alternatives receive limited coverage from advisers.
How does farm land compare and contrast with other investment options Economic conditions since the GFC have reduced returns from a range of asset classes, and continued weakness in the world economy has further damaged sentiment. Table 2: Investment returns - other asset classes. Farm assets The return from farming is made up of the return on the land assets and the return on working capital. Table 3: Victorian farmland values. Farm income - return on working capital The other factor to include in assessing the return from farm ownership is the farm income.
Conclusion Farmland values have appreciated steadily over the long-term and compare favourably with long-term returns from other asset classes since the impact of the GFC, particularly when farm income return from working capital is included. The current economic conditions have reduced the incentives for retiring farmers to sell farmland and invest in a diversified portfolio of other asset classes due to the absence of compelling opportunities.
Key overseas land tenure models On my recent Churchill Fellowship I investigated a range of farm models and alternatives for land tenure which balanced the returns made and risk faced from the investment in land ownership and in working capital. Key trends observed Leasing was an important part of farming in the UK, Canada and the USA where it covers between 40 and 60 per cent of farmland.
The industrialisation of agriculture is very important. Discourses such as these ignore the inevitable tensions that arise: clear-cutting tropical forests to make way for palm oil plantations destroys carbon sinks; removing local farmers to make way for commercial plantations might enable efficient food production for global markets, while undermining the food security of local people.
Often the presumed outcome is that African farmers will become wage workers on their own land, yet most assessments — including The World Bank's report on "rising investor interest" in agriculture — have found that they are invariably worse off as workers than as self-employed farmers. Yet there are emerging answers, coming from Africa's farmers themselves. The international movement of peasants and family farmers, La Via Campesina literally, "the peasant path" , has rejected efforts to "clean up" land grabs by creating good governance guidelines for the private sector to regulate itself.
And African farmers' organisations from across West, East and Southern Africa are now mobilising around an alternative vision for the future, not of corporate-dominated industrial agriculture, but family farming feeding Africa and the world.
Central to their programme are two inter-related concepts. Land sovereignty means that development should not be based on dispossession but on securing the rights of communities to their land, water and forests, and to supporting their types of farming methods. Food sovereignty means privileging local and regional markets, and limiting the role of corporations in the food system. In these ways, they argue, investment in African farmers — rather than investment that dispossesses them — can produce ample, healthy and safe food.
These arguments reflect the ongoing battle over how to define and ensure responsible agricultural investment. The Committee on World Food Security recently presented its "zero draft" for consultation with African stakeholders in Johannesburg — and the response was telling.
African farmer organisations insisted that transparency is just a starting point. Following years of chronic neglect, African agriculture is in desperate need of investment. What is needed for a turnaround in African agriculture must start with reconsidering the slashing of subsidies, agricultural deregulation and trade liberalisation that constituted the policy formula foisted on many African states over the past three decades.
Responsible investment frameworks tend to wrongly assume that investments are necessarily external, private and land-based. Other possibilities include public as well as private investments in infrastructure, goods and services to enable farmers to commercialise and scale up production, access cheap and appropriate inputs, improve their productivity, add value to their products, access better markets, and fetch better prices for improved quality products. Demand for agricultural commodities is outpacing supply, positioning farmland for long-term appreciation.
In brief, the following factors are important in driving the fundamental investment rational for farmland investments:. Approximately 7. Census Bureau, compared to 1. The rate of population growth is not expected to temper as the United Nations U. The majority of population growth is expected to originate in emerging economies with developed countries remaining stable.
In order to feed the world's growing and longer-living population, agricultural output will need to double by according to the U. This will be a daunting goal to accomplish as agricultural resources are already strained.
In the last decade, agricultural output has grown by 2. In order to double agricultural output by , output must increase at 3. Historical grain production statistics suggest reaching this goal will be difficult. In 9 of the last 10 years, the global consumption of grain has outpaced production according to the USDA.
To meet future demand, experts are predicting that global agriculture will need to produce more food in the next 50 years than what was produced during the previous 10, years, putting more and more pressure on future farmers and the land they use to produce our food. The reason food demand is growing faster than population growth is the development of middle classes in emerging markets, due to above average GDP growth.
The Brookings Institute estimates that by , China's middle class could grow to over million, compared to only million in Economists have long shown that as GDP rises, so does the consumption of animal protein as a percentage of diet. As emerging economies continue to develop, there will be a transfer from a grain-based diet to a protein-based diet.
Roughly half the increase in global calorie consumption in the past decade has been a result of higher meat consumption according to the FAO. On average, it takes two pounds of grain to produce one pound of chicken, five pounds of grain to produce one pound of pork, and seven pounds of grain to produce one pound of beef. The rapid industrialization of developing markets will have serious repercussions on the demand for grain.
In China alone, we may have roughly million more people demanding a protein-based diet. As the world's middle class continues to develop over the next decade, the demand for grains will grow exponentially. Concerns regarding climate change and fossil-fuel dependency have led to a significant focus on renewable fuels, such as ethanol, as a replacement for high polluting carbon-based fuel sources.
Ethanol is primarily manufactured from crops such as corn, wheat, and sugar cane. The Renewable Fuel Standard from the Energy Act calls for total renewable fuel to reach 36 billion gallons by In January of , the EPA approved the use of E15 gasoline for vehicles manufactured or newer. Currently, almost all gasoline in the U. The increase to E15 will help the U. Ethanol exports are also steadily increasing due to growing biofuel demand from the EU and Brazil.
Grain supplies, in the U. The global demand for food and rising commodities prices have driven agriculture fundamentals to the best in decades. Despite the rapid growth in agriculture over the last few years, farmers' balance sheets remain very conservative. Strong farm income and minimal use of debt have allowed the U. Farmland, through current income and capital appreciation, has been one of the top performing investments over the last century.
Over the past years, farmland has only decreased in value three times: during the Great Depression, the inflation crisis of the early s, and most recently during the housing crisis of and Despite three bumps in the road over the last years, historical U. Over the last 20 years, American farmland has provided a total return to investors of Similar long-term appreciation in farmland has been experienced in Europe, South America, and Australia.
One of the most attractive attributes of farmland is the cash rental income. Since , cash rents have yielded roughly 5. Cash rent yields have increased from the nadir in and we expect the yield to continue to approach the historical year average of 5.
Farmland REITs offer investors a way to join billionaires in the agricultural land-grab bet on a booming, and hungry, global population. Let's look at several different ways you can take part in the farmland investing scene: Buy & sell farmland yourself; Crowdfunded investing. I first began covering Farmland Partners (NYSE:FPI) in November , FPI is a growth story, and the investment thesis is to capitalize on highly.