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 _________________________________________________________________________________

This important DGC Asset Management (DGC) legal notice should be reviewed carefully prior to reading the contents of this document. Jurisdiction The information in this document may contain material which could be interpreted by the relevant authorities in the country in which you are based, or of which you are a resident, as a financial promotion or an offer to purchase a controlled investment. Accordingly, the information in this document is only intended to be viewed by persons who fall outside the scope of any law that seeks to regulate financial promotions in the country of your residence or in the country in which this document is being read. If you are uncertain about your position under the laws of the country of which you are a resident or in which this document is being read then you should seek clarification by obtaining legal advice from a lawyer practicing in the country of your residence or in the country in which this document is being read. You must confirm that you are eligible to read the information contained in this document pursuant to all applicable laws within your country of residence or the country in which the document is being read. There are certain legal and regulatory limitations that may apply to the information contained in this document and by reading it you are deemed to have read and understood this warning. In reading this document, you are expressly stating your belief that the information it contains falls outside the scope of any law that seeks to regulate financial promotions in the country in which you are reading the document or in which you are a resident and that by reading this document you will not contravene, or cause DGC to contravene, any such law. Information and Liability Although DGC has used its best efforts in preparing this document, we make no representations or warranties with respect to the accuracy or completeness of its contents. DGC specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. DGC have no fiduciary duty to you, the reader of this document, unless expressly agreed, and assume no responsibility to advise on, and makes no representation as to the appropriateness or possible consequences of, any action you may take with respect to any information contained herein. DGC shall not be held liable for any loss, loss of profit or any other damages, including but not limited to, special, incidental, consequential, or other damages. This document may contain certain information that is forward looking and, by its nature, such forward-looking information is subject to important risks and uncertainties. The words: anticipate expect may should estimate project outlook forecast or other similar words are used to identify such forward looking information. Those forward-looking statements

herein made by DGC, if any, are given as of the date they are expressed herein and reflect DGCs beliefs and assumptions based on information available at the time the statements were made (including, without limitation, that (i) the demand for essential commodities such as timber will continue to grow at a pace that is unlikely to be matched by growth in agricultural productivity, and (ii) investment demand for tangible assets such as agricultural commodities, farmland and timberland properties will continue to increase for the foreseeable future. Actual results or events may differ from those anticipated or predicted in these forward-looking statements, and the differences may be material. Factors which could cause actual results or events to differ materially from current expectations include, among other things: risks associated with the ownership and operation of agricultural property assets, including fluctuations in interest rates, rental rates and vacancy rates; general economic conditions; local real estate markets; supply and demand for agricultural properties; competition for available agricultural properties; weather; crop diseases; the price of grain and other agricultural commodities such as timber or feedstock for biofuel production; changes in legislation and the regulatory environment; and international trade and global political conditions (for more information on risks, please see the Risk Factors section in the final pages of this document. Although it is believed that the expectations conveyed by the forward-looking information contained (if any) are reasonable based on information available at the date such statements were made, no assurance can be given as to future results or events and so readers are cautioned not to place undue reliance on any forwardlooking information contained in this presentation (if any). All forward looking information, whether written or oral, are expressly qualified in their entirety by these cautionary statements. DGC undertakes no obligation to update or revise any forward-looking information, whether as a result of new information, future events or otherwise. Neither this document nor any of its contents constitute an offer, recommendation, or solicitation to any person to enter into any transaction or adopt any hedging, trading or investment strategy, nor does it constitute any prediction of likely future movements in rates or prices or any representation that any such future movements will either exceed or not exceed those shown in any text or illustration herein. No information provided in this document in relation to any product or investment should be construed as advice on the suitability or otherwise of that product or investment to any person, such suitability depending on all the circumstances of the person concerned. Nothing contained in this document constitutes financial, investment, legal, tax or any other advice nor is it to be relied on in making an investment or any other decision. You, the reader of this document, are to make your own independent judgment with respect to any matter contained herein and to seek your own independent professional advice where appropriate.

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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 2.2 2.3 2.4 2.5 2.6 3.1 3.2 3.3 3.4 3.5 3.6 3.7 3.8 4.1 4.2 4.3 4.4 4.5 4.6 4.7 5.1 5.2 Population growth Dietary Shift Agricultural productivity Climate Change Biofuels Farmland Availability Capital preservation Inflation hedging Income Total returns The recessionary hedge Portfolio diversification Simplicity and security Tax incentives United Kingdom North America South America Europe Asia Africa Summary Let land Greenfield development General investment risk Commodity prices General agricultural risk Geographic risk Liquidity Regulatory risk Inflation / Deflation Currency risk Counterparty risk Asset specific risk

3. Investment Characteristics

4. Investment Performance

5. Investment Strategies

6. Risks
6.1 6.2 6.3 6.4 6.5 6.6 6.7 6.8 6.9 6.10

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. 2. 3. 4. Economic uncertainty (poor visibility). Price volatility in mainstream assets. Concerns over inflation. Poor returns on cash deposits.

Consequently, Investors are seeking alternative investment assets that display the following characteristics: 1. 2. 3. 4. 5. Tangible assets that retain capital value. Simple, secure investments involving direct ownership of underlying tangible assets. Assets that generate tax-efficient income to replace lost risk-free income. Low or zero correlation to financial markets. 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 welldiversified 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 onfarm 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, highdemand 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 31 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 worlds 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).
st

225,000
Daily global population growth

400%
Population growth in 100 years

100%
Grain demand growth by 2050

Danica May Camacho: The worlds 7 billionth person

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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 thats 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, Livestocks 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 3540% of all cereal produced in 2008 was used as feed for livestock (FAO, 2006, Livestocks long shadow). This leaves an estimated 43% of cereal production available for human consumption after losses from harvest, postharvest 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 carns, INRA). This indicates great potential for increased meat demand on a global basis given that lowincome countries which account for 5.1 billion of the worlds 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 worlds 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).

35-40%
Proportion of global grains production used for animal feed

7kg
Amount of grain required to produce 1kg of beef

100%
Increase in meat calories consumed in South Asia by 2050

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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 1535% 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

15%
Decline in South African wheat production by 2030

27%
Decline in South African maize production by 2030

1000%
Increase in natural disasters between 1960 and 2008

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 20302050 (UN Environment Programme Rapid Response Assessment, 2009, The Environmental Food Crisis: The environments role in averting future food Crises).

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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, agricultural and energy 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 coarsegrain market. By 2017, approximately 40% of the countrys 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

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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 13%) and 5% by 2050 (range 28%) (United Nations Environment Programme Rapid Response Assessment, February 2009, The Environmental Food Crisis: The environments 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

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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 builtup area were to be at the expense of cropland,

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
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.

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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 PandyaLorch, 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, Livestocks 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.

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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 worlds 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.

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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 jointventure 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.

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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 1980s, 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.

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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.

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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
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.

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%.

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

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4.2

North America
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.

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.

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
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,

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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 doubleharvesting 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

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4.4

Europe
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 Romanias 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 countrys 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.

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

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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

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4.5

Asia
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 Dhabis 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.

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 doesnt 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.

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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 UKbased 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 countrys 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 countrys constitution. The deal fuelled anti-government protests that had already been occurring in the country. In March 2009, a military-backed coupdetat forced the resignation of President Marc Ravalomana, and the newly installed leader Andry Rajoelina subsequently cancelled Daewoos contract.

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4.7 Australia and New Zealand

The Australasian continent has been a key focus for institutional investors and sovereignbacked 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), Chinas 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 foodsourcing 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 years 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

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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.

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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.

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
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 worlds 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%.

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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 worlds most successful investors, including Jim Rogers, whose farmland investment vehicle Agrifirma owns 69,188 hectares of land in Brazil. The firms investment strategy involves developing agricultural properties to add capital value, then capturing income through on-going operations. According to the Agrifirmas website: Agrifirmas 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 Adecoagros 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

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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.

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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 shortterm 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.

6.3 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.

6.2 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.

6.4 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.

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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.

6.7 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.

6.6 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.

6.8 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.

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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 erosionprone 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.

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

Sector

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.

Location

Asset

Investable Opportunities

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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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